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ADDRESSES 


Made  at  the 


Fifth  Annual  Meeting 


of 


The  Liability  Insurance 

Association 


on 


State  Insurance  of  Workmr 
Gompensation   for   Accidents 

HOTEL  ASTOR,  NEW  YORK  CITY 

October  Nineteenth 
Nineteen  Blevea 


Prtitmtd  j'tf    h. 


-'iHli-'''r'  •*!  I 


THE  LIABILITY  INISUHANCE  A!>S«..k.i.A;11<)N 


IW>l1l4il»)ll1IIIIMIH1HI'WMHIIti)W« 


If 


# 


ADDRESSES 


Made  at  the 


Fifth   Annual    Meeting 


of 


The  LiabiUty  Insurance 
Association 


on 


State  Insurance  of  Workmen's 
Compensation  for  Accidents 

HOTEL  ASTOR,  NEW  YORK  CITY 

Ocflober    Nineteenth  .    , . . 


Nineteen*  .Eleven    " 

)  >    >    »  *    * 


•    •    • 


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• '  ••  •/"♦..     •  •      ... 


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[{\\ 


Liability  Insurance  Association 


MEMBERS 

JEtna  Life  Insurance  Company,  Hartford,  Conn. 
Casualty  Company  of  America,  New  York,  N.  Y. 
The   Employers'   Liability  Assurance    Corporation,    Ltd.,    United    States 

Branch,  Boston,  Mass. 
Employers'  Indemnity  Company,  Philadelphia,  Pa. 
The  Fidelity  and  Casualty  Company,  New  York,  N.  Y. 
The   Frankfort   Marine,   Accident   and    Plate    Glass   Insurance    Company, 

United  States  Branch,  New  York,  N.  Y. 
General  Accident  Fire  &  Life  Assurance  Corporation,  Ltd.,  United  States 

Branch,  Philadelphia,  Pa. 
Globe  Indemnity  Company,  New  York,  N.  Y. 
London  Guarantee  and  Accident  Company,  Ltd.,   United   States   Branch, 

Chicago,  111. 
Maryland  Casualty  Company,  Baltimore,  Md. 
New  Amsterdam  Casualty  Company,  New  York,  N.  Y. 
The  Ocean  Accident   and    Guarantee    Corporation,    Ltd.,  United    States 

Branch,  New  York,  N.  Y. 
The  Pennsylvania  Casualty  Company,  Scranton,  Pa. 
People's  Surety  Company,  New  York,  N.  Y, 
The  Philadelphia  Casualty  Company,  Baltimore,  Md. 
Pacific  Coast  Casualty  Company,  San  Francisco,  Cal. 
Royal  Indemnity  Company,  New  York,  N.  Y. 
The  Standard  Accident  Insurance  Company,  Detroit,  Mich. 
The  Travelers'  Insurance  Company,  Hartford,  Conn. 
Union   Casualty  Insurance  Company,  Philadelphia,   Pa. 
United  States  Casualty  Company,  New  York,  N.  Y. 
United  States  Fidelity  and  Guaranty  Company,  Baltimore,  Md. 

OFFICERS 

President 
A.  Duncan  Reid,  General  Manager  Globe  Indemnity  Co.,  New  York,  N.  Y. 

Vice-President 
Theodore  E.  Gaty,  Secretary  Fidelity  &  Casualty  Co.,  New  York,  N.  Y. 

Secretary-Treasurer 

Walter  E.  Hoag,  Assistant  United  States  Manager  General  Accident  Fire 
and  Life  Assurance  Corporation,  Ltd.,  Philadelphia,  Pa. 

EXECUTIVE  COMMITTEE 

Chairman 

C.  H.  Franklin,  United  States  Manager  Frankfort  Marine,  Accident  & 
Plate  Glass  Insurance  Company,  New  York,  N.  Y. 

W.  F.  Moore,  President  New  Amsterdam  Casualty  Co.,  New  York,  N.  Y. 

Edmund    F.    Green,    President    Pacific    Coast    Casualty    Company,    San 

Francisco,  Cal. 

J.  J.  Murray,  General  Superintendent  The  Employers'  Liability  Assurance 

Corporation,  Ltd.,  Boston,  Mass. 

And  the  Officers  of  the  Association. 


384737 


INDEX 


Page. 
Invasion  of  the  Insurance  Field  by  the  State 5 

(Address  of  Mr.  P.  Tecumseh  Sherman) 

State  Insurance  of  Workmen's  Compensation  for  Accidents 20 

(Address  of  Mr.  Frank  E.  Law) 

Is  the  State  to  Compensate  Injured  Workmen ? 45 

(Address  of  Mr.  S.  H.  Wolfe) 

Compensation    for    Accidents   to   Workpeople — Should   it   Be   Ad- 
ministered by  the  State  ? 57 

(Address  of  Mr.  J.  Scofield  Rowe) 

State  Employers'   Liability  Insurance    (or  Workmen's  Compensa- 
tion)          71 

(Address  of  Mr.  Edson  S.  Lott) 

Rate  Making  Under  State  Supervision 87 

(Address  of  Mr.  John  T.  Stone) 


>    1  *  * 

ADDRESS  OF  MR.  P.  TECT/MS^i^'^SKEiRMifl^'''  '  ''  ' '''    5 


INVASION  OF  THE  INSURANCE  FIELD 

BY  THE  STATE 

Address  of  Mr.  P.  Tecumseh  Sherman 

Former  Commissioner  of  Labor,  State  of  New  York 

Just  now  there  is  a  considerable  inclination  in  public  opin- 
ion towards  state  insurance  of  compensation  for  industrial 
injuries,  owing  to  dissatisfaction  with  the  accident  insurance 
companies  on  account  of  their  high  rates  (actual  or  proposed) 
in  the  States  which  have  recently  enacted  elective  compensa- 
tion laws.  In  public  discussions  of  the  workings  of  our  old 
employers'  liability  laws  it  was  common  to  hear  all  classes 
affected  denounced  as  scoundrels  and  robbers, — the  employers 
and  judges  by  the  employees,  the  workmen  and  juries  by  the 
employers,  and  the  lawyers  and  insurance  companies  by  every- 
body. Then  along  came  the  advocates  of  "compensation"  and 
pointed  out  that  the  fault  was  not  with  people,  but  with  the 
law.  Now,  under  a  hybrid  mixture  of  the  compensation  and 
the  tort  liability,  it  is  expected  that  everybody  will  be  good 
and  everything  generally  satisfactory — that  the  workmen  and 
employers  may  select  whichever  of  two  or  three  liabilities  they 
want,  and  that  for  a  trifling  amount,  insurance  companies  will 
assume  the  employers'  risks  and  pay  the  bills.  But  you 
"wicked"  insurance  people,  without  experience  under  this  new 
combination  of  liabilities,  insist  upon  charging  a  rate  calcu- 
lated to  cover  the  risk — which  rate  is  high  beyond  popular 
expectations.  Perhaps  later  some  limited  form  of  insurance 
under  these  conditions  can  be  worked  out,  for  which  a  more 
acceptable  rate  can  be  made.  But  in  the  meantime  your  com- 
panies are  in  for  a  torrent  of  abuse.  And  what  is  the  remedy 
now  being  proposed?  To  amend  the  legal  liability  so  as  to 
make  it  more  insurable?  No.  To  follow  the  Massachusetts 
example  of  building  up  an  employers'  mutual  insurance  or- 
ganization so  as  to  furnish  reasonable  rates  if  the  companies' 
rates  are  unreasonable?  Again,  no.  But  it  is  proposed  to 
resort  blindly  to  State  insurance.  State  insurance  has  the  ad- 
vantage that  it  can  offer  most  acceptable  rates  of  premiums, 


• 


I  •>        e  f.  ^  J  <  ;  r 

'*'  '  -"  '  .X&RRE§S:b?Jl^?t.  P.^^ECUMSEH  SHERMAN 


for  it  need  not  make  those  rates  high  enough  to  pay  for  the 
risks — any  deficiency  caused  by  the  rates  being  put  below  cost 
can  be  left  for  the  taxpayers  to  settle  later.  And  the  "waste- 
fur*  expenses  of  private  insurance  can  thereby  be  eliminated; 
for  the  expenses  of  investigating  to  fix  rates  can  be  avoided 
by  simply  guessing  at  them,  and  the  expenses  of  investigating 
claims  in  order  to  determine  their  validity  can  be  avoided  by 
simply  allowing  them.  Having  thus  naively  side-stepped  all 
the  disturbing  difficulties  in  the  way  of  administering  the 
law  rightly  and  of  making  ends  meet,  the  problem  becomes 
supremely  simple  and  State  insurance  the  ideal  solution.  But, 
if  the  problem  of  insuring  compensation  for  industrial  acci- 
dents cheaply  can  be  thus  simply  solved,  why  not  have  the  State 
insure  everything  for  everybody  in  the  same  way  regardless 
of  cost  and  at  ^'acceptable"  rates, — not  only  insure  against 
industrial  accidents  but  also  against  all  accidents,  sickness, 
death,  old  age,  unemployment,  insanity,  fire,  flood,  etc.? 

The  answer  to  that  question  is,  of  course,  obvious, — that 
State  insurance  does  not  really  solve  the  problem,  but  evades  it. 

In  what  follows  I  will  present  to  you  what,  in  my  opinion, 
are  the  principal  objections  to  State  insurance  of  compensa- 
tion. 

In  Europe  and  the  Colonies  of  Great  Britain  there  are 
four  principal  forms  of  the  law  of  compensation  for  work 
injuries. 

(i)  The  simple  form  of  employers'  legal  liability  for 
compensation — the  form  of  Great  Britain  and  its  Colonies. 

(2)  Compulsory  mutual  insurance  of  compensation — the 
German  and  Austrian  form. 

(3)  Compulsory  State  insurance  of  compensation — the 
Norwegian  form. 

(4)  Compulsory  insurance  of  compensation  in  various 
optional  ways— the  form  of  Italy,  Finland,  The  Netherlands, 
etc. 

Even  if  we  believe  that  the  German  system  of  compulsory 
mutual  insurance  is  the  best,  yet  we  cannot  adopt  it,  because 
it  is  fitted  only  to  political,  social  and  industrial  conditions  far 
diflFerent  from  ours.  More  particularly  the  trade  associations, 
with  powers  of  regulation,  etc.,  over  the  estabHshments  of  their 


ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN  7 

members,  are  vital  to  the  success  of  the  German  system.  With- 
out that  feature  the  German  system  would  result  in  the  sub- 
sidization of  careless  employers  at  the  expense  of  the  careful 
— in  short — in  the  promotion  of  accidents. 

As  between  the  Norwegian  system  of  compulsory  State 
insurance  on  the  one  hand,  and  the  Italian,  Finnish  and  Nether- 
lands' system  of  compulsory  insurance  in  elective  ways  on  the 
other  hand,  the  tendency  of  opinion  just  now  seems  to  be  in 
favor  of  the  Norwegian  method.  For  if  the  State  goes  into 
the  insurance  business  at  all,  it  is  simpler  and  cheaper — indeed 
it  is  practically  essential — for  it  to  have  a  monopoly.  Other- 
wise it  will  get  the  bad  risks  and  the  risks  in  those  employ- 
ments for  which  it  may  accidentally  place  its  rates  too  low,  and 
will  then  have  to  compete  with  private  companies  for  the  good 
business,  and,  of  course,  incur  a  higher  average  cost  of  ad- 
ministration. The  reason  why  the  State  cannot  successfully 
compete  with  private  companies  is  not  far  to  seek;  it  is  be- 
cause it  cannot  conduct  business  as  efficiently  as  can  private 
enterprise.  Its  errors  in  rates  are  constant  and  flagrant.  Its 
cost  of  administration  is  in  some  cases  very  low;  but  that  is 
effected  largely  by  omitting  the  expensive  procedure  requisite 
for  right  conduct  and  efficiency,  so  that  the  real  cost  to  em- 
ployers and  to  the  public  may  eventually  be  very  high.  The 
State  insurance  office  may  secure  the  entire  field  to  itself  by 
operating  at  a  loss;  but  if,  to  avoid  that,  it  jacks  up  rates 
arbitrarily,  private  companies  will  underbid  for  the  really  good 
risks,  and  leave  the  State  to  carry  the  bad.  We  seldom  hear 
well-informed  advocates  of  State  insurance  boast  of  its  suc- 
cess in  Italy,  Belgium  or  the  Netherlands.  To  thrive,  State 
insurance  must  have  a  practical  monopoly — there  must  be  com- 
pulsory State  insurance  within  the  field  in  which  it  operates. 
Therefore,  Norway  is  the  only  model  to  follow,  if  we  elect 
State  insurance. 

The  choice,  therefore,  narrows  down  until  it  lies  between 
compulsory  State  insurance,  as  in  Norway,  and  a  simple  com- 
pensation liability  law,  as  in  England. 

There  is  one  vital  factor  omitted  in  the  calculations  of 
the  majority  of  the  advocates  of  compulsory  insurance.  Their 
object  is  merely  to  distribute  the  wage  losses  from  industrial 


8  ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN 

accidents.  But  that  is  not  the  sole  object  of  a  compensation 
law.  Two  of  the  principal  objects  of  the  compensation  law 
are  to  do  prompt  average  justice  and  to  prevent  accidents. 
These  latter  objects  our  advocates  of  State  insurance  generally 
ignore.  It  is  the  prevailing  opinion  of  experts  in  industrial 
safety,  that  the  imposition  upon  employers  individually  of  the 
compensation  liability  for  approximately  all  accidents  occur- 
ring in  their  respective  establishments,  is  the  most  efficient 
single  means  of  effecting  a  reduction  in  industrial  accidents, 
and,  therefore,  that  if  the  employer  be  required  by  law  to 
insure  the  payment  of  that  liability,  the  cost  of  his  insurance 
should  be  very  closely  in  proportion  to  what  would  be  his 
direct  liability  were  it  not  for  the  insurance.  But  if  insurance 
enables  an  employer  to  shift  the  excess  of  his  liabilities  (over 
the  average)  upon  his  competitors,  the  effect  will  be  to  en- 
courage him  to  continue  the  use  of  dangerous  processes  and 
equipment,  obsolete  machinery  and  cheap  and  unskilled  labor, 
to  increase  the  intensity  of  his  labor  and  to  relax  his  care  and 
efforts  for  safety.  If,  for  example,  A.  is  in  competition  with 
X.,  Y.  and  Z.,  and  his  buildings,  ways,  machinery,  etc.,  by 
reason  of  particular  defects,  while  otherwise  entirely  efficient, 
are  comparatively  dangerous,  so  as  to  cause  twice  as  many 
accidents  (in  proportion  to  numbers  employed)  as  the  re- 
spective plants  of  X.,  Y.  and  Z.,  which  are  safer,  but  yet  no 
more  efficient,  what  material  inducement  is  there  for  A.  to 
spend  large  sums  to  re-equip  his  plant  for  the  sole  purpose  of 
avoiding  a  financial  liability  which  X.,  Y.  and  Z.,  all  his  com- 
petitors, must  share  equally  with  him  anyhow?  The  illustra- 
tion is  crude,  but  the  economic  truth  that  it  illustrates  is  the 
crucial  factor  to  be  dealt  with  in  accident  prevention.  It  is 
a  thesis  of  the  advocates  of  compulsory  insurance:  "That  the 
cost  of  caring  for  injured  workmen  and  their  families  should 
be  paid  in  such  a  manner  as  to  enter  into  the  price  of  the 
products  or  the  services  and  be  paid  ultimately  by  the  con- 
sumer." But  that  thesis  is  indefinite,  in  that  it  does  not  specify 
into  the  price  of  what  particular  products  that  cost  should 
enter.  Referring  to  the  previous  illustration — if  the  cost  of 
compensating  for  the  accidents  in  the  establishment  of  A. 
should  be  proportionately  five  times  that  cost  in  each  of  the 


ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN  9 

establishments  of  X.,  Y.  and  Z.,  respectively,  should  the  con- 
sumers of  the  products  of  X.,  Y.  and  Z.  pay  part  of  that  item 
in  the  cost  of  the  products  of  A.,  and  should  the  consumers  of 
the  products  of  A.  get  them  at  a  price  which  does  not  include 
that  full  item  in  their  cost,  because  a  large  proportion  of  it 
has  been  shifted  over  upon  A/s  competitors?  I  think  not;  and 
therefore  contend  that  the  thesis  in  question  should  be  amended 
to  specify  that  the  cost  of  caring  for  workmen  injured  in  the 
production  of  a  product  should  be  added  as  an  item  in  the 
price  of  that  product,  and  should  not  be  distributed  among 
other  like  products  or  among  Consumers  generally;  otherwise 
we  would  be  subsidizing  uneconomic  production.  It  is  perhaps 
possible  that  the  State  may  be  able,  by  statutory  regulations, 
to  compel  all  employers  in  each  industry  to  maintain  something 
approaching  a  common  level  of  safety,  so  that  a  "flat"  rate 
for  each  industry  would  correctly  distribute  the  compensation 
cost.  But  such  a  level  of  safety  could  only  be  low;  for  State 
regulations  are  inevitably  either  merely  elementary  or  too  gen- 
eral, inelastic  and  inexpert  to  effect  the  high  level  of  safety  that 
could  be  reached  if  safety  were  to  be  made  an  economic  ad- 
vantage to  the  individual  employer.  Accidents  are  not  so  much 
in  proportion  to  violations  of  State  regulations  as  they  are 
in  proportion  to  the  risks  inherent  in  the  trade,  to  the  care 
and  conduct  of  the  employer,  to  the  character  of  his  equiva-i 
lent  (including  personnel)  and  to  the  intensity  of  his  "drive.'* 
It  is  simply  a  fetich  to  believe  that  the  State  by  formal  regu- 
lations can  control  these  latter  factors  of  danger  as  well  as  the 
employer  can  or  as  he  would  if  given  a  direct  economic  motive 
for  so  doing.  And  the  idea  that  State  officials,  in  fixing 
premium  rates  for  State  insurance,  can  gauge  the  differences 
between  the  levels  of  risk  in  different  industries,  so  as  cor- 
rectly to  distribute  the  accident  cost  between  the  different 
industries,  has  so  far  proved  wholly  illusory  in  practice. 
Equally  illusory  is  the  idea,  embodied  in  the  Washington  law, 
that  State  officials  can  correctly  differentiate  as  to  exceptionally 
dangerous  establishments  in  particular  industries,  for  the  pur- 
pose of  imposing  an  exceptionally  high  premium  rate  upon 
such  establishments, — for  that  supposes  a  common  level  of 
safety,  with  a  few  conspicuous  exceptions,  whereas  in  fact,  the 


lO  ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN 

different  establishments  in  each  industry  are  more  apt  to  run 
the  gamut  of  the  scale  of  safety  conditions,  so  that  if  the  rate 
of  insurance  is  varied  for  one  it  should,  in  fairness,  be  varied 
for  many  or  for  all.  The  German  method  of  insurance  in 
trade  associations  secures  a  proper  distribution  of  accident 
cost  as  between  the  different  trades ;  and,  by  confiding  to  each 
trade  association  powers  of  self-regulation,  it  so  nearly  suc- 
ceeds in  producing  a  common  (and  nevertheless  a  high)  level 
of  safety  in  all  the  establishments  in  each  trade,  that  a  flat 
rate  of  premiums  for  each  trade  approximately  distributes  the 
accident  cost  correctly  among  the  individual  employers,  and 
thereby  tends  to  reduce  accidents.  But  the  German  method 
of  insurance  is  not  strictly  State  insurance.  And  the  German 
regulations  for  safety  are  corporate  self  regulations  and  not 
State  regulations.  And  no  form  of  State  insurance  has  ever 
yet  been  devised  or  suggested  which  fits  this  problem  of  pro- 
moting safety.  The  first  objection  to  State  insurance,  there- 
fore, is  that  it  would  result  generally  in  an  arbitrary  flat  rate 
in  each  trade,  which,  while  it  might  distribute  the  cost  of  com- 
pensating for  accidents,  would  not  distribute  it  justly  nor  so 
as  to  offer  any  economic  inducement  to  the  individual  em- 
ployer to  exert  the  utmost  thought  and  care  and  to  go  to  the 
extreme  of  his  ability  in  expense  in  order  to  reduce  the  pro- 
portion of  accidents  in  his  own  establishment.  This  objection 
to  State  insurance  is  illustrated  by  a  comparison  between  the 
premium  rates  in  England,  under  simple  compensation,  and 
the  rates  in  Norway  under  State  insurance.  In  England,  the 
rate  for  each  trade,  being  subject  to  competition,  is  elastic,  and 
varies  approximately  in  proportion  to  the  estimated  risk  in 
each  establishment.  In  Norway  the  rate  for  each  industry  is 
"flat" ;  and  experience  shows  that  in  the  past  the  rates  for  the 
respective  industries  have  generally  been  either  about  double 
or  about  one-half  the  estimated  cost  of  the  compensation  lia- 
bility accrued;  in  other  words,  not  only  have  the  safer  estab- 
lishments paid  part  of  the  losses  in  the  less  safe  establishments 
in  the  same  trade,  but  many  trades  have  paid  part  of  the  losses 
in  other  trades.  Perhaps  under  the  exceptional  management 
of  the  Norwegian  insurance  office  the  rates  will  be  gradually 
adjusted  until  in  time  they  will  become  approximately  fair  as 


ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN  H 

between  the  different  trades;  but  the  vital  objection  will  still 
remain  that  the  careful  employer  will  be  made  to  pay  the  same 
rate  as  the  careless  employer — in  short,  that  in  regard  to 
this  whole  subject  employers  will  be  reduced  to  the  condition 
of  mere  wards  of  the  State,  so  that  each  will  have  to  take 
whatever  rate  the  State  may  give  him  and  will  feel  called  upon 
to  take  only  the  precautions  against  accidents  that  the  State 
may  require.  That  is  far  from  being  the  most  effective  way 
to  prevent  accidents.  But  it  is  a  most  effective  first  step  on 
the  way  to  complete  State  control  and  operation  of  industries. 

We  come  now  to  the  question  of  comparative  cost. 
Under  simple  compensation,  cost  has  only  one  aspect — 
namely,  cost  to  the  employer;  although  it  is  also  material 
to  study  further  how  much  of  that  cost  may  be  economic 
waste  in  commissions  and  profits  of  the  insurers; — for  the 
simple  compensation  liability  leads  to  voluntary  insurance 
in  private  companies  only  comparatively  less  general  than 
compulsory  insurance.  Under  compulsory  State  insurance 
there  are  two  aspects  in  which  to  study  cost:  i.  e.,  cost  to 
employers  and  cost  to  the  State.  Care  must  therefore  be 
exercised  in  comparing  the  premium  rates  under  simple 
compensation  and  under  State  insurance,  otherwise  it  will 
be  a  comparison  between  the  whole  cost  and  only  a  part 
of  the  cost — for  one  of  the  great  dangers  of  State  insurance 
is  that  in  the  long  run  the  premium  rates  charged  employ- 
ers will  be  a  mighty  small  part  of  the  cost  to  the  State. 

There  is  only  one  working  example  of  compulsory 
State  insurance  of  compensation — the  Norwegian  system. 
(In  Washington  the  insurance  is  not  of  "compensation.") 
Except  as  to  justice  and  the  prevention  of  accidents,  which 
that  system  ignores — in  other  words,  as  a  pure  insurance 
proposition — the  experience  under  the  Norwegian  system 
has  so  far  been  quite  favorable,  (i.  e.,  so  far  as  known,  for 
Norwegian  experience  is  to  a  large  degree  hidden  from  us 
by  difficulties  of  language).  To  what  extent  that  favorable 
experience  has  been  due  to  the  extremely  favorable  condi- 
tions in  Norway,  is  a  question.  The  experiment  has  been 
on  a  small  scale,  for  the  population  of  Norway  is  only 
about  2,200,000,  of  whom  only  a  relatively  small  proportion 


12  ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN 

are  engaged  in  industries  covered  by  insurance ;  the  popula- 
tion is  stable,  which  is  an  important  factor  in  cheapness  and 
correctness  of  administration,  and  the  vital  dangers  of  the 
scheme   have   not  yet   been   fairly   tested,   because   it   has 
been  only  a  few  years  in  operation  and  so  far  has  hap- 
pened to  be  under  the  charge  of  an  unusually  competent 
insurance  expert,  and  singularly  free  from  politics.     But 
even  under  such  conditions,  the  insurance   rates   in   Nor- 
way are  not  apparently  any  lower  than  the  medium  Eng- 
lish  rates.     It  may  be  that  the  maximum   English   rates 
really  prevail,  in  which  case  insurance  in  Norway  is  sub- 
stantially the  cheaper  for  employers;  but  it  must  be  borne 
in  mind  that  Norwegian  insurance  covers  only  compensa- 
tion for  accidents,  while  the  English  rates  cover  also  a  lia- 
bility for  compensation  for  occupational  diseases   and  an 
alternative  liability  for  full  damages  in  tort  in  certain  ex- 
ceptional cases.     And  against  any  advantage  in  the  Nor- 
wegian   rates    must   be    offset    the   -fact    that   those    rates 
promptly  resulted  in  a  deficiency  in  the  reserves  to  cover 
accrued  liabilities.     It  is  true  that  the  deficiency  was  small 
— only  about  $100,000 — but  on  the  same  scale  in  New  York 
or  Pennsylvania  a  similar  error  would  have  resulted  in  a 
deficiency  of  several  million  dollars — no  mere  trifle  to  be 
made  up  by  the  public.     And  this  misadventure  under  the 
careful  Norwegian  management  indicates  a  grave  danger 
of  State  insurance — namely,   a  tendency  to  make  a  good 
showing  for  cheap  management,  leaving  it  to  the  taxpayers 
generally  to  make  good  the  loss  from  any  probable  error. 
The  Washington  scheme  is  a  novel  experiment  on  a  conserv- 
ative  scale   and   the   law   is   excellently   framed,   but   it   is 
subject  to   about  the   same    dangers    as    the    Norwegian 
scheme.     The   Ohio  scheme  has  no   requirement   for  any 
form  of  reserves  and  it  has  the  functions  of  assessing  pre- 
mium rates  and  of  adjudicating  claims   confided   without 
rule  or  limitation  to  the  discretion  of  a  political  board  of 
three  members,  subject  to  political  influences  in  the  direc- 
tion of  low  rates  and  high  awards.    It,  therefore,  is  subject 
to  vastly  greater  danger  of  miscarriage  than  the  Norwegian 
scheme.     Experience  and  reason  both  excite  the  fear  that 


ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN  I3 

such  schemes  will  result  in  deficiencies  and  occasionally  in 
heavy  deficiencies.  And  deficiencies  would  undoubtedly 
be  most  serious  evils ;  for  the  effect  of  a  deficiency  is  to 
transfer  the  burden  of  paying  compensation  from  the  em- 
ployers responsible  for  the  injuries,  to  persons  not  in  any 
way  responsible. 

It  is  a  strong  argument  in  favor  of  State  compulsory 
insurance  that  the  expense  of  operation  in  Norway  has 
been  calculated  to  be  only  ii%,  while  the  corresponding 
expense  of  the  English  companies,  under  a  regime  of  private 
compensation,  has  been  about  36%  of  premiums — in  other 
•words,  what  is  generally  regarded  as  an  economic  waste 
appears  to  be  three  times  as  great  in  England  as  in  Nor- 
way. But  the  correctness  of  the  11%  figures  is  open  to 
serious  doubt,  and  the  force  of  this  argument  is  further 
weakened  by  two  considerations:  (i)  So  far  as  expense 
of  operation  covers  the  cost  of  investigation,  etc.,  requisite 
for  the  differentiation  of  rates  in  proportion  to  the  actual 
risks  in  each  trade  and  under  different  employers  and  in 
different  establishments  it  is  not  waste,  but  is  most  desir- 
able even  at  a  high  price.  Consequently,  so  far  as  State 
insurance  saves  expense  by  ignoring  that  differentiation 
where  it  is  material.  State  insurance  is  "cheap"  only  in  a  de- 
rogatory sense — i.  e.,  it  is  bad.  (2)  In  Norway,  under 
State  insurance,  all  payments  for  compensation  (except  by 
several  railroads,  which  are  exempted  from  the  law)  are 
subject  to  this  11%  waste.  But  in  England  a  material  pro- 
portion of  establishments,  which  pay  their  compensation 
obligations  regularly,  do  not  insure  or  insure  themselves, 
and  thus  escape  this  waste  altogether.  And  not  only  that, 
but  under  the  latitude  which  the  compensation  law  of  Eng- 
land most  wisely  allows  and  encourages,  but  which  a  com- 
pulsory State  insurance  law  would  tend  to  discourage,  some 
large  establishments  have  evolved  insurance  and  compen- 
sation schemes  of  their  own — with  and  without  reinsurance 
— more  beneficial  to  employees  and  more  effective  for  the 
prevention  of  accidents  than  any  general  scheme  prescribed 
by  any  law.     That  is  the  ideal  for  large  establishments — 


14  ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN 

more  desirable  even  than  the  German  system  at  its  possible 
best. 

Now  let  us  consider  the  specific  dangers  of  State  in- 
surance. State  insurance  means  that  the  State  is  to  embark 
in  business.  The  general  object  of  business  is  to  make  a 
profit.  But  State  insurance  of  compensation  is  not  intended 
to  make  a  profit.  What,  then,  is  its  object?  If  there  is 
general  agreement  upon  its  object  or  upon  several  consist- 
ent objects,  and  little  danger  of  its  being  diverted  to  other 
purposes — all  right.  But  if,  on  the  other  hand,  the  ad- 
vocates of  compulsory  insurance  have  diflferent  and  practi- 
cally inconsistent  objects,  or  if  the  scheme  is  subject  to 
excessive  danger  of  being  diverted  to  other  and  less  de- 
sirable purposes  than  those  intended — all  wrong.  Now, 
as  a  matter  of  fact,  the  objects  of  compulsory  insurance  are 
not  clearly  defined  nor  agreed  to  and  it  is  peculiarly  liable 
to  be  diverted  from  its  original  purposes.  The  Washington 
law  is  designed  to  prevent  destitution  by  insuring  to  the 
victims  of  industrial  accidents,  not  "compensation"  but 
merely  a  minimum  means  of  existence  not  proportioned  to 
wage  loss.  The  purpose  is  commendable;  but  it  is  not  the 
object  of  the  advocates  of  compulsory  insurance  of  "com- 
pensation." And  as  a  substitute  for  the  liability  for  dam- 
ages in  all  cases  it  is  most  improbable  that  the  pittances 
which  the  Washington  law  allows  will  long  content  the 
working  people — in  other  words,  that  law  is  almost  certainly 
doomed  to  prompt  amendments,  that  will  change  its  pur- 
pose. The  object  of  the  Norwegian  law  is  to  insure  com- 
pensation of  the  employees  injured  in  each  trade  covered, 
at  the  expense  of  the  employers  in  that  trade,  to  be  as- 
sessed ratably  according  to  pay  rolls;  while  the  object  of 
the  advocates  of  a  simple  compensation  law  with  a  legal 
obligation  to  insure  added,  is  to  secure  compensation  for 
industrial  injuries  at  the  expense  of  the  particular  employ- 
ers responsible.  Under  the  German  system  these  two  ob- 
jects are  to  a  degree  harmonized  by  a  peculiar  practice 
which  comes  near  to  placing  the  risks  in  every  establish- 
ment in  the  same  trade  on  a  par ;  but  without  that  harmon- 
izing factor  these  two  objects  are  practically  inconsistent. 


ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN  I5 

The  most  generally  avowed  object  of  the  American  advo- 
cates of  compulsory  insurance  is  to  "distribute"  the  shock 
of  the  cost  to  employers  of  compensating  for  industrial  ac- 
cidents.    But  distribute  among  whom?    Among  the  public 
generally,   among   all   taxpayers,   among   those   in   nowise 
responsible?     That  is  certainly  the  object  towards  which 
their  schemes  are  directed,  whether  or  not  that  be  their 
conscious  purpose.     But  to  so  distribute  the  compensation 
cost  would  in  effect  subsidize  unnecessary  extra-hazardous 
processes,  methods  and  practices.     That  object,  therefore, 
deserves  the  most  emphatic  condemnation.     It  is  in  effect 
an  entirely  different  proposition  from  the  economic  doctrine 
that  the  accident  cost  in  production  should  be  distributed 
among  consumers  by  adding  that  item  in  the  cost  of  a  prod- 
uct to  its  price — for  that  does  not  mean  that  the  compen- 
sation cost  in  one  product  should  be  distributed  among 
other  products,  but  that  it  should  be  added  to  the  price  of 
that  particular  product.     Equally  objectionable  is  the  pur- 
pose of  State  insurance  which  many  of  the  representatives 
of  the  working  people  have  in  view.     They  claim  that  in- 
dustrial employees  are  as  much  the  benefactors  of  the  State 
as  soldiers,  and  deserve  to  be  pensioned  by  the  State  for 
injuries,   like  soldiers,   regardless   of   expense   and   of   the 
methods  of  meeting  that  expense.     But  soldiers  serve  the 
State,  while  private  workmen  serve  their  employers;  and 
for  the  same  reason  that  the  State  "compensates"  the  dis- 
abled soldier,  the  private  employer — not  the  State  nor  the 
public — should  compensate  the  disabled  workman.     State 
insurance,  then,  is  not  yet  a  formulated  scheme  with  a  defi- 
nite object;  but  its  advocates  are  divided  into  groups  with 
diverse  and  inconsistent  objects;  and  its  social,  industrial 
and  economic  effects  will  vary  radically  according  to  the 
objects  towards  which  its  methods,  when  formulated  and 
defined,  are  directed.     It  may  be  used  to  throw  a  part  of 
the  accident  cost  of  this  generation  over  upon  the  succeed- 
ing generation,  to  subsidize  the  hazardous  industries  at  the 
expense  of  the  State  or  of  the  safer  industries,  to  favor 
unionized  trades  at  the  expense  of  the  non-unionized,  or 
vice  versa,  etc.,  in  short  it  is  a  screen  behind  which  the 


l6  ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN 

cost  of  compensating  for  injuries  may  be  shifted  in  any 
way  and  in  any  proportion  that  the  legislature  or  the  board 
of  officials  to  whom  the  legislature  confides  the  administra- 
tion may  make  up  its  mind  to,  from  time  to  time.  In  Ohio, 
for  example,  no  methods  of  insurance  are  prescribed  by  the 
law.  The  Board  of  Awards  may  tax  the  employers  affected 
almost  as  it  chooses,  may  maintain  the  fund  about  as  it 
chooses,  and  may  make  awards  against  the  fund  almost 
to  whom  it  chooses  and  upon  such  evidence  as  it  chooses — 
without  right  of  appeal  in  anyone  except  the  claimant.  The 
scheme,  therefore,  is  unformulated,  indefinite  and  easily 
divertible  towards  any  object  that  the  Board  of  Awards, 
in  the  use  or  misuse  of  its  discretion,  may  decide.  And 
right  there  arises  the  political  danger.  There  will  be  no 
direct  private  interest  to  keep  individual  claims  within 
proper  bounds,  but  there  will  be  thousands  of  claimants 
exerting  strong  political  pressure  upon  the  board  to  allow 
exaggerated  or  illegal  claims.  Will  the  board  stand  firm, 
scrutinize  all  claims  critically  and  incur  the  heavy  expense 
requisite  to  investigate  them  properly?  And  will  it  court 
unpopularity  with  employers  by  imposing  insurance  rates 
high  enough  to  establish  a  safe  reserve  to  meet  the  yearly 
accumulations  of  continuing  pensions?  Is  it  not  more 
probable  that  it  will  commit  the  common  error  of  omitting 
needful  investigations  in  order  to  show  a  low  rate  of  ex- 
pense, allow  exaggerated  and  doubtful  claims  in  order  to 
please  the  working  people  and  fix  low  rates  in  order  to 
please  the  employers?  And  if  that  probability  occur,  the 
scheme  will  become  a  social  evil  of  the  worst  kind. 

The  problems  involved  in  the  adjudication  or  allow- 
ance of  claims  for  compensation  are  serious  enough  to  de- 
serve separate  consideration.  Claims  for  compensation 
must  not  be  indiscriminately  allowed;  for  the  tendency  to 
malinger  and  the  opportunities  for  fraudulent  impositions  in 
claims  for  dependency  under  a  compensation  law  are  so 
great  as  to  imperil  the  success  of  the  whole  scheme,  unless 
effectively  checked.  The  German  practice  of  shifting  the 
burden  of  compensation  for  the  first  13  weeks  of  disability 
onto  the  sickness  insurance  fund   (to  which  the  working 


ADDRESS  OF  MR.  P.  TECUMSEH  SHERMANT  I7 

people  contribute)  tends  to  check  malingering,  and  the  Gar- 
man  employers*  association,  which,  in  first  instance,  pass 
upon  all  claims,  are  diligent  to  prevent  impositions;  never- 
theless fraudulent  impositions  have  been  so  great  under  the 
German  scheme,  as,  in  the  opinion  of  many  close  observers, 
to  condemn  the  whole  scheme.  And  in  every  other  com- 
pensation insurance  country  of  which  I  have  any  informa- 
tion on  this  point — unfortunately  I  have  none  as  to  Nor- 
way— the  complaints  about  malingering  and  impositions 
are  yet  more  insistent.  And  the  difficulties  of  avoiding 
these  abuses  would  be  far  greater  here  than  in  Europe.  For 
in  the  northern  countries  of  continental  Europe  all  points 
of  information  about  a  workman  requisite  to  avoid  im- 
positions in  the  application  of  the  compensation  law  in  case 
of  an  injury  to  him  are  generally  of  record  and  easily  ac- 
cessible— his  age,  the  fact  of  his  marriage,  the  names  and 
ages  of  his  wife,  children,  parents,  etc.,  are  all  facts  easily 
ascertainable  and  proved.  In  America  on  the  other  hand, 
with  our  lack  of  vital  statistics  and  unstable  and  immigrant 
working  population,  such  necessary  facts  are  infinitely  more 
difficult  and  expensive  to  ascertain  and  often  impossible  to 
prove.  The  opportunities  for  fraudulent  claims  for  de^ 
pendency,  etc.,  are,  consequently,  far  greater  here  than  in 
Europe.  And  in  order  to  prevent  malingering  and  ex- 
aggerations of  disability  upon  a  wholesale  scale  it  will  be 
essential  to  provide  adequate  and  efficient  machinery  for 
a  careful  and  critical  investigation  of  all  claims  for  disa- 
bility. On  the  continent  of  Europe  the  machinery  for  that 
purpose  existed  ready  made,  at  the  time  of  the  adoption  of 
the  insurance  laws,  in  the  local  police  and  health  officers, 
who,  in  highly  centralized  systems  of  government,  are  so 
closely  correlated  with  central  administration  that  they  can 
be  used  most  efficiently  by  the  State  insurance  office  for  its 
purposes.  But  in  America  there  is  no  such  machinery.  Arc 
we  then  going  ahead  blindly  with  a  scheme  that  foreign 
experience  indicates  is  peculiarly  apt  to  create  a  class  of 
parasites  upon  employers*  or  State  liability  and  a  regime 
of  fraud  and  imposture?  This  question  does  not  apply  to 
simple   compensation,   for  there   the   employer  is   directly 


l8  ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN 

liable,  and  being  "Johnny  on  the  spot"  will,  with  the  means 
provided  by  the  compensation  law,  protect  himself  against 
fraud  and  imposture ;  and,  if  he  insures,  his  insurers  will  to 
some  degree  command  his  services,  and  besides,  being  in 
business  for  profit,  will  have  an  economic  interest  to  go 
to  the  expense — miscalled  economic  waste — necessary  to 
guard  against  imposition.  But  where,  under  State  com- 
pulsory insurance,  the  State  assumes  the  liability,  the  em- 
ployer is  out  of  it  and  the  whole  task  of  investigating  claims 
will  fall  upon  the  State.  In  New  York,  for  example,  there 
would  pour  into  the  State  insurance  office  about  2000  no- 
tices of  accidents  a  month.  How  would  the  State  deal  with 
them?  It  should  in  each  case  ascertain  whether  the  injury 
was  one  entitling  the  injured  person  to  compensation,  i.  e. — 
whether  it  arose  out  of  and  in  the  course  of  the  employ- 
ment, and  not  from  an  excepted  cause,  etc.  It  should  then 
ascertain  the  earnings  of  the  injured  workman,  the  nature 
of  his  injury  and  the  degree  and  duration  of  his  disable- 
ment— or,  in  case  of  fatal  injury,  the  names,  ages,  resi- 
dences, relationship,  etc.,  of  his  dependents.  Then,  where 
pensions  are  allowed  it  should  continuously  observe  the 
pensioners  so  as  to  stop  or  reduce  payments  upon  proper 
contingencies.  And  it  is  a  sine  qua  non  of  the  success  of 
a  compensation  law  that  all  these  things  should  be  done 
justly,  according  to  the  law,  without  partiality,  with  the 
lowest  practicable  margin  of  error  and  at  minimum  ex- 
pense— for  the  expenses  will  be  very  material.  The  means 
provided  for  performing  these  functions  in  Ohio  and  in 
Washington  seem  to  me  ridiculously  inadequate.  The  idea 
relied  upon  that  a  few  officials  in  a  central  office — with  the 
aid  of  a  few  investigators  in  the  field  to  look  into  special 
cases  or  of  district  physicians  serving  part  time  for  fees — 
can  effectually  sift  out  frauds  and  exaggerations  in  such  a 
mass  of  claims,  shows  that  the  magnitude  of  the  problem 
has  been  wholly  unappreciated.  Of  course  a  small  force 
might  handle  the  initial  adjudication  of  claims  by  making 
all  claimants  prove  their  cases;  but  that  would  impose  an  un- 
endurable hardship  upon  the  working  people,  and  would 
miss  the  great  advantage  of  a  simple  compensation  law,  as 


ADDRESS  OF  MR.  P.  TECUMSEH  SHERMAN  I9 

exemplified  in  England — which  is  that  it  results  generally  in 
the  prompt  payment  of  compensation  without  intermediate 
formalities. 

Turning  from  the  difficulties  of  doing  what  ought  to  be 
done  under  State  insurance  to  the  facilities  that  it  offers  for 
doing  what  ought  not  to  be  done,  we  naturally  look  to  that 
exemplar  of  all  imperfections — the  Ohio  law.  We  find  there 
provisions  for  a  board  of  three  political  functionaries,  clothed 
with  the  power  to  award  judgments  for  compensation  against 
the  insurance  fund  to  alleged  victims  or  alleged  dependents  of 
alleged  victims  of  industrial  accidents.  From  a  judgment  by 
that  board  a  claimant  may  appeal,  but  neither  the  State  nor  a 
taxpayer.  Here  then  is  a  single  board  to  adjudicate  con- 
clusively against  the  insurance  fund  upon  about  500  claims 
a  month.  For  every  claim  rightly  rejected  or  reduced  a 
political  enemy  will  be  created;  while  for  false  or  exaggerated 
claims  allowed  there  will  be  no  one  personally  and  directly 
interested  to  object.  It  is  then  a  not  improbable  prediction  that 
the  board  will  in  time  bend  in  the  direction  of  allowing  all 
claims — particularly  as  that  would  avoid  the  cost  of  investiga- 
tion and  thereby  keep  down  the  expense  of  administration, 
which  expense  it  is  now  the  fashion  to  regard  altogether  as 
economic  waste.  And  if  that  board  should  bend  at  all  from 
the  strict  line  of  duty,  it  is  more  than  probable  that  it  would 
bend  far  and  avail  itself  to  the  full  of  its  political  opportuni- 
ties, which  are  to  distribute  judgments  for  pensions  according 
to  political  influences.  If  such  misuse  of  its  power  by  the 
board  should  be  accompanied,  as  it  naturally  would  be,  by  a 
prompt  and  sympathetic  allowance  of  all  just  and  meritorious 
claims,  the  support  of  the  only  class  directly  interested  in  the 
distribution  of  the  insurance  fund,  i.  e.,  the  working  people — 
would  probably  be  secured ;  and  it  is  difficult  to  see  what  politi- 
cal check  would  act  to  stop  the  easy  misuse  of  this  scheme, 
until  the  exhaustion  of  the  fund  or  the  creation  of  a  startling 
deficiency  should  arouse  the  general  public. 

My  conclusion,  then,  is  that  in  experimenting  with  State 
insurance  we  are  playing  with  fire:  that  the  course  of  State 
insurance  is  uncharted  and  runs  perilously  close  between  the 
Scylla  of  socialism  and  the  Charybdis  of  organized  graft. 


ADDRESS  OF  MR.  FRANK  E.  LAW 


STATE    INSURANCE   OF   WORKMEN'S   COM- 
PENSATION FOR  ACCIDENTS 

Address  of  Mr.  Frank  E.  Law 

Vice-President,  The  Fidelity  and  Casualty  Company  of  New  York 

After  some  years  of  discussion  and  preliminary  in- 
vestigation, followed  by  abortive  legislative  enactments  in 
several  States,  a  considerable  number  of  the  States,  taking 
counsel  from  the  mistakes  made  in  the  initial  legislation, 
have  passed  joint  employers'  liability  and  workmen's  com- 
pensation acts  designed  to  overcome  the  constitutional  diffi- 
culties and  to  possess  characteristics  that  will  lead  em- 
ployers and  employees  to  accept  the  workmen's  compen- 
sation system  of  compensating  workmen  for  accidental  in- 
juries in  place  of  the  employers'  liability  system.  The  de- 
cision of  the  New  York  Court  of  Appeals,  declaring  the 
compulsory  workmen's  compensation  act  of  that  State  un- 
constitutional, has  pointed  out  to  legislators  the  probable 
necessity  of  adopting  elective  or  optional  acts  in  default 
of  amendment  of  the  State  and  Federal  Constitutions.  The 
failure  of  the  Massachusetts  and  New  York  elective  or 
optional  acts  to  meet  with  acceptance  by  employers  or 
employees  has  indicated  to  legislators  the  probable  neces- 
sity of  enacting  employers'  liability  legislation,  concur- 
rently with  the  workmen's  compensation  legislation,  that 
will  make  the  employers'  liability  system  of  compensating 
workmen  for  accidental  injuries  more  costly  than  the  work- 
men's compensation  system  and  so  induce  employers  to 
choose  the  workmen's  compensation  system. 

The  reason  for  the  failure  of  the  New  York  elective 
act  seems  to  have  been  the  fact  that  the  act  made  it  easy 
for  employers  to  adopt  the  employers'  liability  system  and 
relatively  difficult  to  adopt  the  workmen's  compensation 
system  because  of  the  cumbrous  plan  provided  for  secur- 
ing employees'  consents.  The  reason  for  the  failure  of  the 
Massachusetts  elective  act  is  obscure,  but  it  may  have  been 


ADDRESS  OF  MR.  FRANK  E.  LAW  21 

that  the  time  was  not  ripe  for  it,  men's  minds  not  having 
gotten  into  a  receptive  attitude  toward  it  because  the  ad- 
vantages of  workmen's  compensation  had  not  been  suffi- 
ciently considered,  or  it  may  have  been  on  account  of  the 
fact  that  no  scheme  of  benefits  was  laid  down  in  the  act, 
employers  and  employees  being  left  free  to  work  out  their 
own  schemes.  It  was  undoubtedly  this  outcome  of  the 
New  York  and  Massachusetts  legislation  that  caused  the  / 

New  Jersey  Legislature  to  adopt  an  act  which,  in  the  first  / 
place,  was  elective  and  which,  in  the  second  place,  by  re- 
moving all  of  the  employers'  defences  and  thus  making 
the  employers'  liability  section  of  the  act  cost  more  than  / 
the  benefits  provided  in  the  workmen's  compensation  sec- 
tion and  by  making  the  choice  of  the  workmen's  compen- 
sation section  of  the  act  easy,  both  employers  and  em- 
ployees being  presumed  to  have  accepted  it  unless  they 
gave  notice  each  to  the  other  that  they  did  not  accept  it, 
ensured  the  quite  general  acceptance  of  the  workmen's  com- 
pensation section  by  employers  as  the  method  of  com- 
pensating their  workmen  for  accidental  injuries.  The  fact 
that  under  the  workmen's  compensation  system  benefits  were 
certain  and  immediate,  being  obtained  without  long  drawn  out 
and  expensive  litigation,  was  relied  upon  to  cause  employees  to 
choose  to  come  under  the  workmen's  compensation  section  of 
the  act. 

The  motives  impelling  the  New  Jersey  legislators  to 
draw  their  act  on  the  lines  they  did  doubtless  impelled  the 
California  and  Wisconsin  legislators  also.  But  the  Cali- 
fornia and  Wisconsin  legislators  seem  to  have  lacked  accu- 
rate information  regarding  the  cost  of  workmen's  compen- 
sation benefits.  However  that  may  be,  the  cost  of  the 
benefits  under  the  workmen's  compensation  section  of  the 
California  and  Wisconsin  acts  will  be  greater  than  the  cost 
of  settling  claims  under  the  employers'  liability  section,  so 
that  it  is  not  likely  many  employers  will  elect  to  come 
under  the  workmen's  compensation  section.  Employers  can 
scarcely  be  blamed  for  choosing  the  cheaper  method,  see- 
ing that  they  are  in  competition  with  employers  in  other 
States  having  no  such  burden. 


22  ADDRESS  OF  MR.  FRANK  E.  LAW 

The  States  of  Kansas,  New  Hampshire,  Illinois,  and 
Massachusetts  have  passed  workmen's  compensation  acts 
which  are  not  yet  effective  and  of  which  I  shall  not  speak 
at  this  time,  not  having  had  opportunity  to  study  them 
closely  as  yet.  The  liability  insurance  companies  are  kept 
busy  nowadays  by  the  new  laws,  and  can  get  through  their 
work  only  by  taking  up  each  new  duty  as  it  comes  to  hand. 
They  have  no  leisure  in  which  to  anticipate  things.  Nor 
shall  I  speak  of  the  Montana  and  Nevada  acts,  although 
they  are  now  effective.  To  the  Washington  and  Ohio  acts 
I  shall  refer  briefly  later. 

Whatever  may  be  the  outcome  of  these  various  meas- 
ures, whether  it  turns  out  that  they  are  constitutional  or 
unconstitutional,  one  fact  stands  out  clear,  and  that  is  that 
workmen's  compensation  in  one  form  or  another  will  surely 
be  adopted  in  this  country  as  the  method  of  compensating 
workmen  for  accidental  injuries.  Sooner  or  later  a  measure 
that  is  both  constitutional  and  practical  will  be  devised, 
or,  if  this  cannot  be  done,  the  constitutions  will  be  amended. 
The  workmen's  compensation  movement  is  a  world  move- 
ment, and  in  the  eyes  of  the  community  the  employers'  liability 
system  stands  condemned  by  both  justice  and  humanity. 

While  the  constitutionality  and  practicability  of  the 
workmen's  compensation  acts  that  have  been  passed  are 
still  in  doubt,  it  is  proposed  to  take  a  radical  step  and 
abandon  insurance  of  workmen's  compensation  by  private 
companies,  substituting  in  its  stead  State  insurance  of 
workmen's  compensation.  The  State  of  Washington  has 
enacted  a  compulsory  State  insurance  workmen's  compen- 
sation law  and  the  State  of  Ohio  has  enacted  an  optional 
State  insurance  workmen's  compensation  law.  In  several 
States  the  providing  of  State  insurance  is  in  contempla- 
tion. Three  arguments  appear  to  be  advanced  in  favor  of 
State  insurance, — first,  that  State  insurance  has  worked  well 
abroad;  second,  that  the  State  can  furnish  insurance* 
cheaper  than  can  private  companies;  and  third,  that  the 
insurance  companies  are  overcharging  for  insurance. 


ADDRESS  OF  MR.  FRANK  E.  LAW  2^ 

The  community  then  is  confronted  with  this  very  prac- 
tical question, — shall  it  or  shall  it  not  adopt  State  insur- 
ance of  workmen's  compensation  for  accidents?  Which  is 
superior  and  to  the  greatest  advantage  of  the  community 
in  the  long  run, — insurance  by  private  companies,  stock  and 
mutual,  or  insurance  by  the  State? 

It  may  be  admitted  at  the  outset  that  no  limitation 
can  properly  be  put  on  the  functions  of  government  except 
the  comprehensive  one  of  expediency.  There  is  justifi- 
cation for  the  assumption  by  governments  of  whatever 
powers  that  conduce  to  general  convenience  and  welfare. 

Nevertheless,  the  experience  of  mankind  is  favorable 
to  the  view  that  government  agency  should  be  restricted 
to  the  narrowest  possible  compass  and  that  government 
interference  with  the  business  of  the  community  should  be 
admitted  only  on  the  strongest  reasons.  "Let  alone"  should 
be  the  rule,  every  departure  from  it,  unless  required  by  some 
great  good,  is  certain  to  produce  evil. 

The  extension  of  government  agency  is  objectionable 
because  it  diminishes  the  field  for  the  active  exercise  of 
men's  talents  and  energies  and  so  gives  lessened  oppor- 
tunity for  the  development  of  their  faculties.  Men  are 
made  strong  and  able  to  overcome  difficulties  by  attacking 
difficulties,  not  by  avoiding  them.  The  men  the  commu- 
nity wants  are  the  men  able  to  do  things  for  themselves. 
Men  who  habitually  have  things  done  for  them  become 
mere  creatures  of  habit  and  routine  and  lose  enterprise  and 
initiative.  The  progressive  movement  is  paralyzed  by  do- 
ing things  for  men  that  they  should  do  for  themselves.  It 
is  best  to  leave  things  to  private  enterprise  as  far  as  pos- 
sible, because  that  tends  to  produce  a  strong  and  self-re- 
liant people.  The  genius  of  the  American  people  is  to  in- 
sist that  each  man  shall  do  for  himself  whatever  is  needed 
for  his  well-being  and  not  depend  upon  his  fellow.  This 
argument  will  seem  to  many  purely  theoretical  and  to  range 
too  far  afield  to  be  of  practical  import.  But  is  this  so? 
The  law  of  life  is  competition,  the  striving  each  with  the 
other  as  to  who  will  produce  the  best  results.  Our  civili- 
zation, and  all  that  is  best  in  it,  has  been  built  up  under 


2^  ADDRESS  OF  MR.  FRANK  E.  LAW 

a  system  of  individualism.  Are  not  departures  from  the 
individualistic  system  then,  the  system  under  which  success 
has  been  attained,  to  be  resisted? 

Things  done  by  government  will  not  be  as  well  done 
as  things  done  by  private  agency.  Interest  in  the  result 
will,  be  lacking.  People  understand  their  own  business  bet- 
ter and  manage  it  better  than  any  government  can  or  will. 
The  most  powerful  motive  to  secure  economy  and  capable 
administration  is  self-interest.  Moreover,  when  things  are 
left  to  private  agency  they  will  tend  to  fall  into  the  hands 
of  those  who  can  attend  to  them  better  and  cheaper  than 
any  other  persons. 

So  much  for  the  general  principles  bearing  on  the 
question. 

What  now  shall  be  said  in  particular  regarding  State 
insurance  of  workmen's  compensation  for  accidents? 

First.  That  whatever  is  gained  by  making  insurance 
with  the  State  compulsory  upon  employers  and  thus  elimi- 
nating the  business-getting  expense  of  the  private  insur- 
ance companies  will  be  more  than  offset  by  the  inability 
of  the  State  to  cope  as  effectively  as  the  private  insurance 
companies  with  the  fraud,  malingering,  and  simulation  so 
characteristic  of  numerous  claimants  under  workmen's 
compensation  acts.  The  difficulties  of  administering  the 
State  insurance  fund  will  be  enormous.  Honest  and  fraud- 
ulent claims  will  have  to  be  sifted  out  from  the  great  mass 
of  claims  made.  Ambulance  chasers  and  damage-suit  at- 
torneys will  have  to  be  checkmated.  Is  it  likely  that  the 
subordinate  State  officials  will  develop  the  ability  to  handle 
these  capably?  The  motive  of  self-interest  will  be  absent. 
The  necessity  for  economy  will  not  be  felt.  The  choice  of 
State  officials  will  be  dictated  by  politics  and  their  greatest 
chance  of  securing  popular  favor  will  be  to  make  the  dis- 
bursements as  large  as  possible.  There  will  be  little  or 
no  check  on  State  officials.  To  secure  the  proper  weed- 
ing out  of  fraudulent  and  excessive  claims,  there  is  needed 
the  operation  of  opposing  interests  and  this  situation  can 
exist  only  when  the  insurance  is  supplied  by  private  com- 
panies.    Under  our  system  of  government,  the  tenure  of 


ADDRESS  OF  MR.  FRANK  E.  LAW         >/  2^ 

office  of  State  officials  is  dependent  largely  upon  the  popu- 
lar will,  so  that  the  thought  uppermost  in  the  minds  of  the 
officials  distributing  the  workmen's  compensation  benefits 
will  be  to  please  the  claimant  and  his  friends  rather  than 
to  make  proper  adjustment  of  the  claim.  Unless  there  be 
opposing  interests,  sight  will  soon  be  lost  of  the  fact  that 
the  claim  is  simply  a  legal  obligation,  and  not  charity;  and 
sentiment,  ndl  justice,  will  rule  in  the  settlements.  Some 
one  will  have  to  pay  the  bills,  the  State  cannot  create 
wealth,  and  that  some  one  will  be  the  consumer  and  the 
taxpayer.  Does  any  one  want  to  see  the  prices  of  the 
goods  he  buys  and  the  taxes  he  pays  increased  in  order  to 
satisfy  fraudulent  and  excessive  claims?  Clearly  it  is  in 
the  interest  of  the  poorest,  as  well  as  the  richest  member 
of  the  community,  that  the  cost  of  workmen's  compen- 
sation shall  not  be  increased  by  dishonest  claims.  Private 
companies  will  ferret  out  these  and  avoid  payment  of  them 
with  far  greater  efficiency  than  the  State.  Another  source 
of  great  expense  in  State  insurance  will  be  the  multipli- 
cation of  officials  and  employees  beyond  reason.  And  these 
officials  and  employees  will  not  be  so  competent  and  dili- 
gent as  those  of  private  companies.  The  business  will 
not  have  the  careful  attention  it  would  have  in  private 
hands. 

Second.  That  State  insurance  will  be  against  the  in- 
terest of  the  community  because  it  will  tend  to  the  build- 
ing up  of  a  great  political  machine.  The  cohesive  force 
of  the  desire  of  claimants  to  collect  the  utmost  possible 
sums  from  the  State  will  be  very  great  and  will  be  bound 
to  introduce  into  the  body  politic  a  dangerous  element  pos- 
sessing much  power.  There  can  be  little  doubt  that  the 
officials  and  employees  charged  with  the  responsibility  of 
administering  the  State  insurance  fund  will  be  responsive 
to  this  element  in  a  noteworthy  degree. 

Third.  That  State  insurance  will  put  the  greatest  pos- 
sible strain  upon  the  State  administrative  machinery  be- 
cause of  the  disbursement  by  State  officials  of  huge  sums 
of  money  practically  without  check.  The  adjustment  of 
claims  will  be  made  here  and  there  all  over  the  State  under 


26  ADDRESS  OF  MR.  FRANK  E.  LAW 

circumstances  that  will  demand  honest  and  competent  offi- 
cials. The  dangers  of  partisan  or  corrupt  administration  of 
the  great  insurance  fund  are  very  considerable.  And  even 
if  partisanship  and  corruption  are  absent,  inefficiency  in  ad- 
ministration may  wreck  the  fund.  ; 

Fourth.  That  agencies  of  government  should  be 
adapted  to  the  imperfections  of  human  nature.  The  im- 
perfections of  human  nature  necessitate  the  organization  of 
society  on  a  competitive  basis  instead  of  on  a  socialistic 
basis.  Competition  involves  a  lot  of  effort  that  in  one  sense 
is  wasted,  but  is  the  price  that  society  has  to  pay  to  secure 
the  best  results  as  human  nature  is  constituted.  It  is  not 
possible  to  measure  the  relative  advantage  or  disadvantage 
of  a  thing  solely  by  the  amount  of  expense  it  entails.  Ex- 
pense must  often  be  incurred  to  secure  efficiency  and  to 
induce  men  to  put  forth  their  best  efforts.  State  insur- 
ance will  not  work  because  of  the  imperfections  in  human 
nature. 

The  idea  that  State  insurance  has  worked  well  abroad 
seems  to  be  negatived  by  the  testimony  of  Herr  Ferdinand 
Friedensburg  who  recently  retired  from  the  post  of  Presi- 
dent of  the  Senate  of  the  Imperial  Insurance  Office  of  the 
German  Empire  after  a  service  of  twenty  years.  Regard- 
ing this  testimony,  the  New  York  Times  of  July  9,  191 1,  says 
in  an  editorial: 

'Tt  is  practically  a  series  of  charges  of  which  these 
three  are  most  significant:  The  first  is  that  the  State 
insurance,  especially  designed  to  replace  pauperism 
and  charity,  is  itself  merely  pauperism  under  another 
form.  The  second  charge  is  that  it  has  fostered  to  an 
incredible  extent  the  German  evil  of  bureaucratic 
formalism.  The  third  and  the  worst  charge  is  that 
it  has  become  a  hotbed  of  fraud,  and,  therefore,  a 
spreader  of  demoralizing  practices  and  ways  of  thought. 
As  to  the  first  charge,  he  alleges  that  almost  from  the 
beginning  it  was  found  difficult  to  secure  fair  and 
honest  adjudication  of  claims.  The  principle  of  giv- 
ing the  benefit  of  doubt  to  the  claimant  came  into 
early  operation,  and  the  claims  under  its  insiduous 
influence  multiplied  in  number  and  became  less  and 
less  valid.      The  workmen    began  to  come    as    beggars 


ADDRESS  OF  MR.  FRANK  E.  LAW  TJ 

asking  and  expecting  the  insurance  laws  to  be  stretched 
in  their  favor.  The  expenses  of  the  system  continued 
to  grow  as  the  force  required  increased.  Not  only  has 
the  force  increased,  but  under  the  pressure  of  the  claim- 
ants it  has  been  inefficient  and  wasteful,  so  that  the 
general  costs,  per  insured,  have  increased  50  per  cent, 
since  Herr  Friedensburg  has  been  in  the  service,  while 
the  work  of  inspection  and  regulation  undertaken  by 
the  Government  has  steadily  deteriorated." 

After  all,  what  else  could  be  expected?  The  struggle 
for  existence  is  hard  and  presses  so  heavily  on  working  peo- 
ple that  it  is  not  surprising  that  many  of  them  yield  to 
the  temptation  of  seeking  to  secure  more  than  is  due  them 
or  that  to  which  they  are  not  entitled  under  the  workmen's 
compensation  law,  or  that  the  officials  having  no  personal 
interest  at  stake  give  way  to  their  sympathies  "and  sanc- 
tion the  payment  of  improper  claims.  As  has  already  been 
pointed  out,  there  is  but  one  remedy  for  this  state  of  affairs, 
and  that  is  the  operation  of  opposing  interests  which  is  sup- 
plied when  private  companies  grant  the  insurance. 

It  is  difficult  to  understand  how  the  idea  arose  that 
the  liability  insurance  companies  are  overcharging  for  work- 
men's compensation  insurance.  Apparently  there  is  no  bet- 
ter basis  for  this  idea  than  the  dissatisfaction  of  employers 
arising  out  of  having  to  pay  more  for  workmen's  compen- 
sation insurance  than  for  employers'  liability  insurance.  As 
a  matter  of  fact,  the  rates  made  by  liability  insurance  com- 
panies for  workmen's  compensation  rest  on  the  sure  founda- 
tion of  experience.  Workmen's  compensation  insurance  is 
no  new  thing  to  the  insurance  companies;  they  have  been 
transacting  it  for  years,  under  the  name,  however,  of  work- 
men's collective  insurance.  It  differed  no  whit  from  the 
insurance  now  offered  against  the  workmen's  compensa- 
tion benefits  established  by  law  except  that  the  benefits 
offered  were  much  more  moderate.  Workmen's  compen- 
sation insurance,  or  workmen's  collective  insurance,  is 
simply  personal  accident  insurance  written  on  a  number 
of  workmen  collectively.  The  workmen's  compensation 
rates   were   deduced   from   experience   derived   from  three 


28  ADDRESS  OF  MR.  FRANK  E.  LAW 

sources:  (i)  data  of  deaths,  permanent  disabilities,  and  tem- 
porary disabilities,  relatively  to  the  exposure  under  work- 
men's collective  policies;  (2)  data  under  employers'  lia- 
bility policies  having  a  wage  exposure  of  $3,743,968,ocx)  in 
the  United  States;  and  (3)  data  under  personal  accident 
policies.  Commissions  to  agents  and  brokers  have  been  cut 
and  the  business-getting  expense  has  been  reduced  to  a 
minimum.  But  2J/2  per  cent,  underwriting  margin  has  been 
allowed  for  profit  and  contingencies.  There  will  be  some  in- 
vestment profit  due  to  premiums  being  paid  in  advance,  but 
it  is  impossible  to  say  what  this  will  amount  to  until  it  is 
seen  at  what  rate  the  losses  will  mature. 

Rates  in  this  country  must  necessarily  be  higher  than 
abroad,  because: 

First.  The  higher  benefits  here.  In  Germany  the 
benefits  prior  to  the  expiration  of  the  thirteenth  week  are 
paid  by  the  sick  benefit  societies  and  do  not  come  out  of 
the  accident  benefit  funds  of  the  employers'  associations. 
Necessarily  this  afiFects  the  charges  for  insurance  by  the  em- 
ployers' associations  to  no  inconsiderable  degree.  In  Great 
Britain  the  maximum  benefit  payable  is  $5  a  week,  here  it 
is  quite  generally  $10  a  week.  To  some  extent,  of  course, 
this  is  offset  by  the  lower  wages  abroad,  for  it  will  be 
borne  in  mind  that  rates  are  applied  to  wages  in  calculating 
the  premiums. 

Second.  In  Germany  the  insurance  charges  are  made 
on  the  assessment  plan.  Not  enough  is  collected  in  each 
year  to  extinguish  the  claims  arising  out  of  the  accidents 
of  that  year.  The  consequence  is  that  the  reserves  carried 
are  not  sufficient  to  liquidate  the  existing  liability.  The 
rates  must  therefore  steadily  rise.  This  is  pointed  out 
by  Messrs.  Ferdinand  C.  Schwedtman  and  James  A.  Emery, 
who  say  in  their  book,  "Accident  Prevention  and  Relief", 
pages  146  and  147: 

"It  will  be  seen  that  most  of  the  insurance  rates 
are  extremely  high  as  compared  with  employers'  lia- 
bility insurance  rates  in  the  United  States.  In  fact, 
German  rates  are  higher  than  present  workmen's  in- 
demnity insurance  rates  in  England,  especially  when 


ADDRESS  OF  MR.  FRANK  E.  LAW  29 

we  bear  in  mind  that  the  German  insurance  system 
provides  only  for  a  small  portion  of  deferred  payments. 
Each  year's  assessment  covers  the  actual  cost  of  that 
year,  plus  approximately  lo  per  cent,  for  reserve  fund, 
consequently  the  cost  will  increase  each  year  because 
the  new  permanent  injuries  are  added  each  year  to  the 
existing  old  ones. 

"We  have  asked  a  number  of  prominent  men  what 
the  final  and  permanent  cost  of  insurance  will  be. 
While  this  is  a  difficult  question  to  answer  accurately, 
Professor  Dr.  Manes  gave  us  the  estimate  which  is 
illustrated  in  Figure  114.  (This  figure  shows  that  the 
cost  in  1935,  when  it  is  supposed  the  maximum  and 
final  cost  will  be  attained,  will  be  double  the  present 
cost  in  the  year  1908.)  *  *  *  *  a  number  of  experi- 
enced officials  of  employers'  associations  feel  that  Dr. 
Manes'  estimate  of  nearly  double  the  present  cost  is  too 
high,  but  other  equally  good  men  consider  the  figure  very 
conservative.  If  we  consider  the  estimate  as  correct, 
it  would  mean  that  in  order  to  cover  deferred  payments, 
we  must  practically  double  each  one  of  the  insurance 
rates  shown  on  the  preceding  pages." 

It  will  be  perceived,  therefore,  that  an  entirely  differ- 
ent situation  exists  in  this  country  from  that  in  Germany. 
Here  insurance  companies  are  obliged  to  collect  premiums 
sufficient  to  liquidate  all  the  claims  that  may  arise  under 
the  policies  written,  putting  aside  adequate  reserves  for  the 
deferred  losses.  Insurance  companies  here  are  not  permitted 
to  rob  Peter  to  pay  Paul,  as  is  done  by  the  employers'  as- 
sociations in  Germany;  that  is,  future  employers  cannot  be 
loaded  here  with  losses  that  ought  to  be  paid  by  present 
employers.  The  German  plan  will  not  commend  itself  to 
the  American  people  as  just. 

Third.  The  accident  frequency  is  higher  in  the  United 
States  than  abroad.  This  has  been  shown  by  Mr.  Fred- 
erick L.  Hoffman,  Statistician  of  the  Prudential  Insurance 
Company,  Newark,  N.  J.,  in  a  paper  on  "Industrial  Acci- 
dents", published  in  the  Bulletin  of  the  Bureau  of  Labor 
of  the  United  States  Government,  Washington,  D.  C.,  No. 
78,  September,  1908,  page  458.    The  larger  number  of  acci- 


30  ADDRESS  OF  MR.  FRANK  E.  LAW 

dents  occurring  in  industries  in  the  United  States  makes 
the  cost  here  higher  than  abroad. 

Fourth.  More  care  to  prevent  accidents  is  taken 
abroad  than  in  the  United  States  and  more  money  is  spent 
on  factory  inspection  abroad  than  in  the  United  States. 
The  accident  frequency  is  directly  related  to  these  conditions. 
This  less  care  in  the  United  States  necessarily  makes  the  work- 
men's compensation  cost  higher  here. 

Further,  as  respects  costs,  Messrs.  Schwedtman  and 
Emery  say  in  their  book  on  "Accident  Prevention  and 
Relief",  page  131 : 

"Some  enthusiasts  would  tell  us  that  equitable 
compensation  would  cost  less  than  our  present  em- 
ployers' liability  system.  If  we  take  into  considera- 
tion harmony,  human  happiness,  health,  and  whole 
bodies,  there  is  no  answer  to  such  an  argument,  be- 
cause money  cannot  buy  these  things,  nor  can  money 
compensate  for  their  loss.  However,  the  cost  in  dol- 
lars and  cents  of  an  equitable  compensation,  as  ex- 
pressed in  insurance  rates,  is  much  higher  than  our 
present  employers'  liability  method.  This,  at  least,  has 
been  Germany's  experience,  and  we  cannot  hope  ever 
to  have  a  more  efficient  system  than  Germany  has  now, 
as  shown  in  various  diagrams  on  other  pages." 

The  insurance  companies  deserve  praise,  not  blame; 
help,  not  hindrance.  In  a  difficult  situation,  where  costly 
laws  have  been  enacted  and  where  there  is  the  gravest 
danger  that  their  estimates  of  the  cost  will  be  exceeded, 
they  have  undertaken  to  carry  the  burden  and  distribute 
the  costs  over  the  community,  guaranteeing  that  they  will 
themselves  pay  the  amount  their  estimates  are  exceeded. 
The  popular  conception  is  that  the  liability  insurance  com- 
panies have  derived  large  profits  from  their  business.  This 
is  not  the  case.  A  few  can  show  a  balance  on  the  right 
side  of  the  ledger,  but  most  of  them  will  show  a  loss  when 
all  of  the  claims  have  been  liquidated.  It  is  probable  that 
many  companies  would  have  become  insolvent  had  it  not 
been  for  other  lines  of  insurance  written  which  were  profit- 
able. 


ADDRESS  OF  MR.  FRANK  E.  LAW  3 1 

Lincoln  is  credited  with  the  saying  that  "it  isn't  wise 
to  swap  horses  when  crossing  a  stream".  That  saying  is 
applicable  to  the  present  situation.  The  country  is  substi- 
tuting the  workmen's  compensation  system  for  the  em- 
ployers' liability  system  of  compensating  workmen  for  in- 
juries received  in  industrial  accidents,  and  before  any  test 
has  been  made  of  the  new  system  and  before  it  is  known 
whether  or  not  it  is  properly  planned  and  will  work  well, 
it  is  proposed  to  abandon  insurance  by  private  companies 
in  favor  of  insurance  by  the  State.  Instead  of  swapping 
the  insurance-by-private-companies  horse  for  the  State- 
insurance  horse  whjle  crossing  the  stream  from  the  em- 
ployers' liability  shore  to  the  workmen's  compensation 
shore,  will  it  not  be  wise  to  wait  at  least  till  the  stream 
has  been  crossed?  It  may  be  found  that  there  is  an 
alternative  to  casting  aside  the  companies  that  have  done 
their  work  well  and  putting  the  community  astride  the  dan- 
gerous and  uncertain  experiment  of  State  insurance.  Is 
not  that  alternative  the  supervision  of  insurance  rates  by 
the  State? 

This  alternative  to  State  insurance  is  well  worthy  care- 
ful study  by  legislators.  The  administrative  machinery  of 
the  State  is  greatly  burdened  now,  and  with  the  added 
burden  of  State  insurance,  it  is  likely  to  break  down  en- 
tirely. Things  may  become  too  big  for  even  the  most 
capable  elective  officials  responsible  to  the  people  to  super- 
vise adequately.  Competitive  conditions  supply  a  self-reg- 
ulating principle  that  makes  insurance  by  private  com- 
panies work  properly,  but  no  such  self-regulating  principle 
exists  where  insurance  is  a  monopoly  controlled  by  the 
State. 

I  do  not  mean  to  suggest  that  the  State  should  under- 
take to  fix  directly  the  rates  at  which  the  companies  may 
write  business.  It  is  not  feasible  for  the  State  to  acquire 
the  knowledge  or  the  equipment  to  do  this  properly.  The 
companies  have  employed  trained  men  who  have  made 
the  business  their  life  work,  and  yet  they  have  not  been 
able  to  work  out  satisfactorily  the  making  of  rates.  Is  it 
credible  that  the  State  shall  succeed  in  doing  better  when 


Z2  ADDRESS  OF  MR.  FRANK  E.  LAW 

it  cannot  possibly  command  the  services  of  the  men  whose 
ability  in  this  field  will  find  more  lucrative  and  congenial 
employment  in  private  enterprise? 

What  I  do  mean  to  suggest  is  that  the  companies  be 
permitted  to  form  rate-making  associations  and  that  these 
associations  be  put  under  the  supervision  of  the  State. 
These  rate-making  associations  shall  tabulate  and  combine 
the  experience  of  their  members  and  shall  study  this  com- 
bined experience  and  ascertain  rates  which  shall  be  as 
fair  and  just  to  the  various  risks  as  possible.  These  rates 
shall  be  published  and  the  rate  manuals  shall  be  purchas- 
able by  anybody.  Any  company  shall  be  free  to  join  the 
rate-making  association  and  to  use  its  rates,  but  no  company 
shall  be  compelled  to  do  so.  The  rate^making  associations 
shall  be  equipped  with  the  proper  machinery  to  rate  risks 
up  or  down,  as  the  experience  on  such  risks  indicates  to  be 
proper.  The  object  of  this  special  rating  system  is  to  give 
employers  who  exercise  great  care  to  prevent  accidents  and 
who  equip  their  plants  with  safeguards  the  advantage  of  a 
lower  rate  and  on  the  other  hand  to  penalize  employers 
who  fail  to  exercise  care  and  to  equip  their  plants  with 
safety  devices.  The  idea  is  that  each  insured  shall  make 
a  contribution  to  the  insurance  fund  proportionate  to  his 
hazard.  Each  insured  who  is  dissatisfied  with  his  rate  shall 
possess  the  right  of  appeal  or  hearing  before  the  govern- 
ing or  rating  committee  or  other  proper  executive  of  the 
association  so  that  he  may  make  application  for  a  change 
in  his  rate  and  have  the  data  on  which  his  rate  is  based 
reviewed.  The  association  shall  keep  a  careful  record  of 
its  proceedings  and  shall  furnish  upon  demand  to  any  per- 
son, or  to  his  authorized  agent,  full  information  regarding 
his  rate.  The  association  shall  be  subject  to  the  visitation 
and  supervision  of  the  superintendent  of  insurance  of  the 
State  and  shall  be  examined  at  least  once  every  year  by  the 
superintendent. 

It  is  believed  that  this  method  of  dealing  with  the 
business  will  result  more  satisfactorily  to  the  community 
in  the  long  run  than  prohibition  of  rate-making  associations 
by  anti-compact  laws  or  than  State  insurance. 


ADDRESS  OF  MR.  FRANK  E.  LAW  33 

Combinations  of  experience  and  comparison  of  views 
by  experienced  underwriters  long  in  the  business  are  needed 
to  make  rates  equitable  for  the  hazard,  because  no  one  com- 
pany possesses  sufficient  data  or  sufficient  information  to 
make  rates  that  do  not  discriminate  unfairly  between  class- 
ifications. The  making  of  equitable  rates  demands  coopera- 
tion. Moreover,  the  rates  are  needed  for  all  companies  and 
expense  is  saved  by  all  the  companies  doing  the  work  to- 
gether and  avoiding  duplication. 

Let  it  be  noted  also  that  open  competition  between  the 
companies  in  respect  to  rates  results  in  discrimination  be- 
tween insured  of  the  same  class.  Insured  of  the  same 
hazard  will  some  of  them  get  lower  rates  than  others  when 
the  companies  are  fighting  for  business.  Open  competition 
also  results  eventually  in  a  weakening  of  the  companies. 
No  one  will  gainsay  the  proposition  that  one  of  the  chief 
concerns  of  the  buyer  of  insurance  is  that  the  company 
from  which  he  buys  shall  be  able  to  pay  its  losses  when 
they  accrue.  The  buyer  of  butter,  or  eggs,  or  steel,  or  oil, 
can  test  the  quality  of  the  goods  at  the  time  of  purchase, 
and  it  is  no  concern  of  his  that  the  seller  has  sold  at  an 
inadequate  price  and  bankrupted  himself.  Delivery  by  the 
seller  antedates  payment  by  the  buyer,  and  the  buyer  is 
secure.  But  the  buyer  of  insurance  is  in  a  different  posi- 
tion. It  is  a  matter  of  concern  to  him  that  the  seller  shall 
remain  solvent,  for  it  may  be  years  before  he  calls  upon 
the  seller  to  settle  a  loss  due  him.  Here  payment  by  the 
buyer  antedates  delivery  by  the  seller,  and  the  buyer  is 
not  secure.  For  instance,  it  takes  on  the  average  eight 
years  to  liquidate  the  claims  under  the  liability  policies 
written  in  any  given  year,  and  the  California  and  Wisconsin 
workmen's  compensation  acts  require  the  payment  of  death 
benefits  any  time  within  fifteen  years  after  the  date  of  the 
accident  if  the  death  was  approximately  caused  by  the 
accident.  It  is  only  by  securing  adequate  rates  that  the 
seller  of  insurance  can  continue  solvent,  for  in  the  long 
run  the  premiums  of  an  insurance  company  must  suffice 
to  pay  losses  and  expenses. 


34  ADDRESS  OF  MR.  FRANK  E.  LAW 

The  alternative  to  open  competition  is  combination 
not  merely  to  make,  but  to  maintain  rates.  This,  however, 
does  not  mean  the  creation  of  a  monopoly.  The  attain- 
ment of  a  monopoly  is  not  possible  to  insurance  companies. 
An  insurance  company  cannot,  like  an  industrial  corpora- 
tion, get  control  of  the  available  supply  of  raw  material, 
or,  like  a  railroad,  dominate  a  given  territory.  Any  group 
of  men  with  sufficient  capital  may  embark  in  the  insurance 
business.  The  moment  insurance  companies  put  their  rates 
beyond  a  reasonable  point,  they  invite  disaster  from  the 
competition  of  mutual  companies  and  new  stock  companies. 
Besides,  though  competition  in  rates  be  restricted  in  the 
interest  of  avoidance  of  discrimination  between  insured  and 
in  the  interest  of  the  security  of  the  policyholder,  there  still 
remains  the  competition  of  service  between  the  companies, 
which  is  and  always  will  be  exceedingly  keen. 

In  considering  this  matter  of  rate-making  associations 
I  would  recommend  for  your  careful  perusal  the  report  of 
the  Merritt  Commission  of  New  York  State  on  fire  insur- 
ance published  this  year,  191 1,  under  the  title  "The  Com- 
plete Report  of  the  Findings  of  the  Joint  Legislative  Com- 
mittee of  the  State  of  New  York  covering  the  Subject  of 
Fire  Insurance,  including  the  bills  recommended  for  in- 
troduction into  the  Legislature",  particularly  pages  42,  43, 
44,  and  78;*  Chapter  460  of  the  Session  Laws  of  the  State 
of  New  York  of  191 1,  entitled  "An  Act  to  amend  the  in- 
surance law,  by  providing  for  the  regulation  and  super- 
vision of  rate-making  associations"  (this,  however,  relates 
only  to  fire  insurance  rate-making  associations)*;  and  the 
paper  entitled  "State  Regulation  and  Control  of  the  Busi- 
ness of  Fire  Insurance",  read  before  the  Fire  Insurance 
Commission  of  the  State  of  Illinois,  May  20,  1910,  by  J.  D. 
Browne,  President  of  the  Connecticut  Fire  Insurance  Com- 
pany, of  Hartford,  Conn.,  particularly  pages  25  to  31  inclu- 
sive, beginning  with  "State  Control".* 

For  the  sake  of  emphasis,  I  repeat  that  the  authori- 
zation by  the  State  of  combination  not  merely  to  make. 


*See  Appendix. 


ADDRESS  OF  MR.  FRANK  E.  LAW  35 

but  to  maintain  rates-  through  rate-making  associations 
does  not  mean  the  elimination  of  competition.  The  char- 
acter of  the  business  differentiates  insurance  rate-making 
associations  from  so-called  trusts.  Excessive  rates  are 
avoided  by  insurance  companies  because  excessive  rates 
invite  competition  by  the  entry  of  new  companies  into  the 
field  and  also  tend  to  cause  the  dissolution  of  the  asso- 
ciation. Only  such  companies  as  feel  that  the  rates  recom- 
mended by  the  rate-making  associations  are  necessary  for 
their  continued  existence  will  remain  members  of  the  as- 
sociation. The  public  will  have  the  choice  of  buying  in- 
surance from  the  association  companies  and  the  non-asso- 
ciation companies. 

To  secure  the  utmost  economy  in  the  conduct  of  the 
business,  it  is  indispensable  that  the  companies  shall  be 
empowered  to  agree  through  their  rate-making  associa- 
tions what  commissions  they  will  pay  to  brokers.  Open 
competition  in  respect  to  commissions  is  fatal  to  economy 
and  leads  to  heavy  increase  in  cost  to  the  policyholders. 

In  conclusion,  I  wish  to  make  a  plea  for  fairness  and 
justice  in  the  treatment  of  insurance  companies.  It  is 
popular  to  condemn  insurance  companies  unsparingly,  but 
is  it  fair  or  right?  The  liability  insurance  companies  are 
wrestling  with  many  difficult  problems  which  they  are 
making  a  manful  effort  to  solve  and  are,  I  dare  maintain, 
making  satisfactory  progress.  They  are  doing  excellent 
work  in  preventing  accidents  and  in  helping  solve  the 
problem  of  workmen's  co.mpensation  for  accident  and  are 
taking  measures  for  cutting  down  the  cost  of  insurance. 
If  they  are  helped  by  the  State  they  will  work  out  solu- 
tions satisfactory  to  the  community.  Is  it  not  worth  while 
to  give  them  the  chance  rather  than  to  embark  on  the  dan- 
gerous and  uncertain  enterprise  of  State  insurance? 


36  ADDRESS  OF  MR.  FRANK  E.  LAW 


APPENDIX 


Extracts  from  the  report  of  the  Merritt  Commission  of 
New  York  State  on  fire  insurance  published  191 1  by 
the  "Weekly  Underwriter"  under  the  title  "The  Com- 
plete Report  of  the  Findings  of  the  Joint  Legislative 
Committee  of  the  State  of  New  York  Covering  the 
Subject  of  Fire  Insurance". 

From  pages  42,  43  and  44: 

"As  this  subject  of  rating  has  turned  out  to  be  so  com- 
prehensive, it  is  desirable  to  make  a  summary  of  the  whole 
matter.  First,  it  is  recognized  that  a  rate  equitably  should 
depend  upon  the  hazard ;  that  the  hazard,  however,  is  known 
in  general  only  by  experience;  that  for  this  no  one  com- 
pany has  a  broad  enough  experience  of  its  own  and  that 
therefore  the  making  of  equitable  rates  demands  co-opera- 
tion; furthermore,  since  the  same  rates  are  needed  by  all 
the  companies,  economy  would  suggest  that  the  work 
should  not  be  duplicated. 

"Second,  it  has  been  demonstrated  by  the  experience  of 
all  times  and  all  places  that  open  competition  in  fire  insur- 
ance is  an  unstable  condition  which  leads  to  a  general  weak- 
ening of  the  companies,  and  eventually  to  the  elimination 
of  small  companies,  further  that  under  open  competition 
there  is  always  discrimination  in  favor  of  the  policyholder 
with  influence. 

"The  only  alternative  to  open  competition  is,  however, 
combination  not  merely  to  make  but  to  maintain  rates.  This 
in  general  or  certainly  to  a  degree  makes  it  impossible  for 
the  public  to  obtain  insurance  except  at  the  prices  fixed 
by  the  combination.  The  inability  to  bargain  is  resented  by 
the  public  and  the  rate-making  organizations  have  been 
referred  to  as  trusts  and  combinations  in  restraint  of  trade, 
and  in  many  States  so-called  anti-compact  laws  have  been 
passed  forbidding  the  companies  to  combine  either  to  make 
or  maintain  rates. 


ADDRESS  OF  MR.  FRANK  E.  LAW  37 

"Third,  the  effect  of  the  anti-compact  laws  has  been 
not  to  bring  back  a  state  of  open  competition,  for  this,  as 
has  been  said,  is  an  impossible  condition,  but  to  introduce  a 
weakened  substitute  for  combination,  the  selling  of  *ad- 
visory*  rates  by  an  independent  rater.  These  rates  in  gen- 
eral are  observed,  but  as  the  companies  are  under  no  agree- 
ment to  maintain  them,  the  way  is  open  to  gross  discrimina- 
tion. The  tendency  of  independent  rating  is  in  general  to- 
ward higher  rates  and  toward  a  weakening  of  the  bene- 
ficial economic  effects  of  schedule-rating.  The  discrimina- 
tion in  anti-compact  States  has  become  so  offensive  that 
there  is  a  strong  movement  toward  State  regulation. 

"Fourth,  State  regulation  is  recognized  as  a  far  more 
logical  condition  than  anti-compact,  and  in  the  main  the 
objections  to  it  are  practical  rather  than  theoretical.  The 
principal  question  to  decide  is  whether  the  conditions  war- 
rant so  radical  a  step  and  whether  it  is  likely  that  condi- 
tions would  thereby  be  materially  improved. 

"The  most  serious  theoretical  objection  to  State  rating 
is  that  it  would  be  very  likely  to  make  it  impossible  for  a 
company  to  recoup  itself  after  a  conflagration.  The  prac- 
tical objections  lie  in  the  possibilities  of  its  being  used  for 
political  effect  and  the  fact  that  the  State  does  not  possess 
and  could  not  obtain,  except  with  great  pains  and  expense, 
the  expert  knowledge  upon  which  to  make  rates  properly. 

"Fifth,  it  does  not  appear  that  there  has  been  an  ex- 
cessive profit  in  the  business;  this  would  seem  to  indicate 
that  the  premiums  have  on  the  whole  not  been  too  large. 
Discrimination  between  classes  is,  however,  found  to  exist, 
particularly  in  the  too  high  rating  of  'preferred  risks*.  These 
are  conditions,  however,  which  will  be  cured  by  publicity, 
and  the  general  tendency  toward  equitable  rating  is  unmis- 
takable. 

"Sixth,  not  only  is  combination  necessary  for  equitable 
rating,  but  conversely  the  making  of  equitable  rates  is  the 
consideration  which  should  be  demanded  of  the  companies 
for  the  right  to  combine. 


38  ADDRESS  OF  MR.  FRANK  E.  LAW 

"Seventh,  it  is  believed  that  competition  and  publicity 
are  sufficient  to  insure  this,  particularly  as  the  manifest 
tendency  of  schedule-rating  is  in  this  direction. 

"Eighth,  it  is  shown  that  there  is  intense  competition 
among  the  members  of  rate-making  organizations  and  that 
this  condition  differentiates  such  organizations  from  so- 
called  trusts,  that  excessive  rates  are  not  desired  as  tend- 
ing to  lead  to  a  dissolution  of  the  combination  and  also  to 
the  organization  of  new  competing  companies  and  that  a 
strong  competition  exists  in  most  parts  of  the  country  from 
non-Board  and  Mutual  companies. 

"Ninth,  as  the  companies  have  failed  to  co-operate  in 
collecting  a  common  loss-experience  which  would  serve  as 
a  basis  for  equitable  rating,  it  is  believed  that  steps  should 
be  taken  towards  the  acquirement  by  the  State  of  such 
statistics. 

"It  is  the  belief  of  this  committee  that,  in  the  present 
condition  of  business,  competition  can  be  relied  upon  to 
keep  the  rates  equitable,  particularly  if  re-inforced  by  pub- 
licity. This  committee  fails  to  find  any  condition  which 
would  warrant  the  extreme  step  of  turning  the  rate-making 
over  to  the  State,  and  it  does  not  recommend  State  regula- 
tion of  rates  beyond  certain  steps  looking  toward  closer 
supervision  of  rate-making  bodies  and  the  securing  of 
proper  publicity.  The  committee  believes  that  State  inter- 
ference with  rates  has  not  been  beneficial  and  has  been 
brought  about  upon  the  wholly  theoretical  grounds  that 
combinations  in  fire  insurance  were  a  menace  to  the  people, 
which  an  actual  investigation  of  the  facts  fails  to  disclose. 
This  committee  believes  that  a  purely  academic  view  of 
what  combinations  in  fire  insurance  might  do  should  not 
be  allowed  to  usurp  the  place  of  what  actual  facts  under  a 
reasonable  interpretation  seem  to  show." 

From  page  78: 

"As  to  the  so-called  anti-compact  law:  For  the  many 
reasons  given,  your  committee  believes  that  it  would  be 
most  unfortunate  for  the  public  if  a  condition  of  open  com- 
petition in  rates  were  forced  by  the  State.    The  safe  policy 


ADDRESS  OF  MR.  FRANK  E.  LAW  39 

to  follow  in  treating  this  subject  is  to  recognize  the  good 
which  flows  from  combination  well  regulated ;  to  permit  the 
companies  to  use  rating  associations  and  bureaus  to  develop 
the  principle  of  schedule- rating  and  to  spread  the  cost  of 
determining  proper  rates  among  the  companies,  and  to  per- 
mit them  to  agree  to  maintain  those  rates. 

"It  is,  therefore,  recommended  that  no  anti-compact  bill 
be  passed,  but  that  in  place  thereof  a  statute  be  enacted  that 
will  permit  combination  under  State  regulation,  such  regu- 
lation to  stop  short  of  actually  fixing  the  price  at  which  the 
companies  shall  sell  their  insurance,  but  which  shall  be  of 
such  a  positive  nature  that  all  forms  of  discrimination  in 
rates  will  cease;  such  statute  to  provide  for  the  filing  by  such 
associations  and  bureaus  of  all  schedules  and  specific  rates 
with  the  Insurance  Department,  and  also  that  all  such  as- 
sociations and  bureaus  shall  be  subject  to  the  closest  super- 
vision by  the  Superintendent  of  Insurance,  and  further  that 
all  such  associations  and  bureaus  shall  keep  careful  records 
of  their  proceedings,  and  provide  for  the  hearing  of  inter- 
ested property  owners  who  feel  aggrieved  at  the  rates 
charged — all  to  the  end  that  the  potent  power  of  publicity 
may  operate  freely  to  cure  any  arbitrary  action  or  inde- 
fensible methods." 

Chapter  460  of  the  Session  Laws  of  191 1  of  the  State  of 
New  York, — 

An  Act  to  amend  the  insurance  law,  by  providing  for  the  regu- 
lation and  supervision  of  rate  making  associations. 

Became  a  law  June  28,  191 1,  with  the  approval  of  the  Gov- 
ernor.    Passed,  three-fifths  being  present. 

The  People  of  the  State  of  New  York,  represented  in 
Senate  and  Assembly,  do  enact  as  follows: 

Section  i.  Chapter  thirty-three  of  the  laws  of  nineteen 
hundred  and  nine,  entitled  "An  act  in  relation  to  insurance 
corporations,  constituting  chapter  twenty-eight  of  the  consoli- 
dated laws,"  is  hereby  amended  by  inserting  in  article  three  of 
said  chapter  a  new  section,  to  be  section  one  hundred  and 
forty-one  thereof,  and  to  read  as  follows: 


4P  ADDRESS  OF  MR.  FRANK  E.  LAW 

§  141.  Rate  Making  Associations.  Every  association 
or  bureau  which  now  exists  or  hereafter  may  be  formed  for 
the  purpose  of  making  rates  of  fire  insurance  on  property 
located  in  this  state  shall  be  subject  to  the  visitation  and  super- 
vision of  the  superintendent  of  insurance,  who  shall  cause  an 
examination  of  each  such  association  or  bureau  to  be  made  at 
least  once  a  year,  and  shall  make  public  the  results  thereof, 
and  shall  report  to  the  legislature  in  his  annual  report  on  the 
methods  of  such  associations  or  bureaus  and  the  manner  of 
their  operation. 

Every  such  association  shall  file  with  the  superintendent 
of  insurance  any  schedules  of  rates  or  such  further  informa- 
tion as  he  may  require. 

No  such  association  or  bureau  or  any  person,  association 
or  corporation  authorized  to  transact  the  business  of  fire  insur- 
ance within  this  state  shall  fix  or  make  any  rate  or  schedule  or 
any  credit  therein  which  is  to  apply  to  any  risk  on  the  condi- 
tion that  the  whole  amount  of  insurance  on  such  risk  or  any 
specific  part  thereof  shall  be  placed  at  such  rate,  or  with  the 
members  of  or  subscribers  to  such  association  or  bureau;  or 
shall  fix  or  make  a  schedule  of  rates  or  charge  a  rate  which 
discriminates  unfairly  between  risks  within  this  state  of  essen- 
tially the  same  hazard  belonging  to  classes  having  substantially 
the  same  fire  class  record,  and  which  are  similarly  situated 
and  protected  against  fire;  whenever  it  is  made  to  appear  to 
the  satisfaction  of  the  superintendent  of  insurance  that  such 
discrimination  exists  he  may,  after  a  full  hearing  either  before 
himself  or  a  special  deputy  appointed  for  such  purpose  from 
the  salaried  employees  of  the  insurance  department  whose 
report  he  may  adopt,  order  such  discrimination  removed,  and 
all  such  associations,  bureaus,  persons  or  corporations  affected 
thereby  shall  immediately  comply  therewith;  no  such  associa- 
tion or  bureau  nor  any  two  or  more  persons,  associations  or 
corporations  authorized  to  insure  property  against  loss  by  fire 
within  this  state,  acting  in  agreement,  shall  refuse  to  do  busi- 
ness with  or  pay  commissions  to  any  person  who  may  be 
licensed  by  the  superintendent  of  insurance  as  a  fire  insurance 
broker,  upon  the  ground  or  for  the  reason  that  such  broker 


ADDRESS  OF  MR.  FRANK  E.  LAW  4I 

will  not  agree  to  secure  insurance  only  at  the  rates  of  premium 
fixed  by  such  association  or  bureau. 

Every  such  association  or  bureau  shall  keep  a  careful 
record  of  its  proceedings  and  shall  furnish  upon  demand  to 
any  person  on  whose  property  a  rate  has  been  made,  or  his 
authorized  agent,  full  information  as  to  such  rate,  and  if  such 
property  be  rated  by  schedule  a  copy  of  such  schedule ;  it  shall 
also  provide  such  means  as  may  be  approved  by  the  superin- 
tendent of  insurance  whereby  any  person  or  persons  affected 
by  such  rate  or  rates  may  be  heard,  either  in  person  or  by 
agent,  before  the  governing  or  rating  committee  or  other  proper 
executive  of  such  association  or  bureau  on  an  application  for 
a  change  in  such  rate  or  rates. 

§  2.  This  act  shall  take  effect  September  first,  nineteen 
hundred  and  eleven. 

Extract  from  a  Paper,  entitled  "State  Regulation  and  Con- 
trol of  the  Business  of  Fire  Insurance",  read  before  the 
Fire  Insurance  Commission  of  the  State  of  Illinois, 
May  20,  1910,  by  J.  D.  Browne,  President  of  The  Con- 
necticut Fire  Insurance  Company  of  Hartford,  Con- 
necticut, pages  25  to  31,  inclusive, — 

"State  control.  Finally  and  more  important  than  all 
others,  are  the  questions  you  ask  in  Paragraphs  i,  2,  9,  and  10 
of  your  communication: 

"No.  I.  (a)  Your  reasons  for  or  against  the  state  mak- 
ing rates;  (b)  the  state  supervision  of  rates;  (c)  any  state 
control  over  rates  or  rate  making. 

"No.  9.  Do  you  think  the  state  should  interfere  in  any 
way  with  the  free  and  unrestricted  operation  of  business;  and 
should  the  companies  be  allowed  to  continue  in  the  matter  of 
rates  without  any  restrictions  whatever? 

"No.  10.  Why  should  not  the  state  undertake  the  busi- 
ness of  fire  rating,  get  it  upon  some  decent  basis  so  that  it 
would  be  as  equitable  as  possible,  and  then  require  all  fire 
insurance  companies  to  collect  the  rate,  no  difference  under 


42  ADDRESS  OF  MR.  FRANK  E.  LAW 

what  form  the  business  is  done,  whether  by  corporations,  asso- 
ciations, or  individuals? 

"In  reply  I  would  say,  in  my  opinion,  the  state  over- 
reaches the  fundamental  objects  of  its  being  and  hampers  com- 
mercial interests  when  it  attempts  supervision  of  any  legitimate 
business,  except  where  business  methods  involve  oppression  or 
fraud  or  unreasonable  restraint  of  trade. 

''Monopolies  created  by  the  state  are,  in  a  measure  outside 
of  this  rule  and  are  clearly  proper  objects  of  supervision  in 
the  matter  of  service  and  rates.  Railroads  and  railways,  with 
monopolies  of  routes  or  exclusive  rights  on  highways,  gas. 
electric,  and  water  companies,  with  exclusive  territories,  are 
examples.  By  granting  the  right  to  exercise  the  prerogatives 
of  the  sovereign  and  to  enjoy  exclusive  monopoly  in  particular 
lines,  the  state  reposes  in  these  companies  a  tpust,  whose  bene- 
ficiaries are  the  public  and  whose  fulfillment  is  the  proper 
object  of  governmental  review.  Insurance  companies  do  not 
come  within  this  class  in  any  sense, 

"Monopolies  not  created  by  the  state,  but  developed  from 
trade  conditions  and  combinations,  may  result  in  such  sup- 
pression of  competition  and  free  commerce  as  to  oppress  rivals 
or  the  consuming  public,  and  the  resulting  conditions  may  call 
for  state  interference.  The  remedies  offered  by  the  common 
law  for  such  conditions  may  not  always  be  adequate,  but 
attempts  at  legislation,  such  as  the  Sherman  Act,  show  the 
difficulties  and  dangers  of  general  enactments  upon  these  lines 
by  legislative  bodies. 

"The  business  of  fire  insurance  enjoys  no  state-given 
monopoly;  the  field  is  open  to  any  man  or  body  of  men.  In 
this  country  the  business  seems  to  be  too  hazardous  and  com- 
plicated to  tempt  men  to  engage  in  it,  otherwise  than  through 
corporate  organization.  The  states  offer  to  the  capital  dis- 
posed to  venture  in  this  line,  the  right  to  engage  in  it  under 
the  corporate  form.  Such  incorporation  involves  no  monopoly 
of  the  business.  The  franchise  granted  is  merely  the  right  to 
be  a  corporation  for  the  purpose  of  the  business.  Many,  if  not 
most,  of  our  manufacturing  and  commercial  enterprises  enjoy 
the  same  kind  of  franchise.  A  combination  of  capital  engaged 
in  this  line,  as  in  other  lines,  might,  for  the  time  being,  reach 


ADDRESS  OF  MR.  FRANK  E.  LAW  43 

the  point  of  oppressive  monopoly,  but  the  permanence  of  such 
a  condition  is  hardly  conceivable.  Insurance  managers  cannot 
corner  the  sources  of  supply,  or  control  the  means  of  trans- 
portation, as  perhaps  can  be  done,  and  perhaps  has  been  done, 
in  a  measure,  in  certain  lines  of  business  which  handle  natural 
products,  such  as  oil  and  iron. 

"In  fire  insurance,  so  long  as  the  prospective  pecuniary 
returns  are  sufficient  to  attract  capital,  the  field  is  open  to  all 
comers.  The  only  restraint  against  a  destructive  competition 
is  the  sense  of  self-preservation,  which  refuses  to  allow  the 
business  to  run  riot  to  the  pecuniary  loss  of  the  investor  and 
to  the  jeopardy  of  the  insured.  Protection  of  the  insuring 
public  demands  conservative  methods  and  a  recognition  on  the 
part  of  the  underwriters  of  an  obligation  in  the  nature  of  a 
trust  toward  the  insured  in  the  accumulation  and  conservation 
of  resources  sufficient  to  meet  the  inevitable  crises. 

"Such  a  situation,  in  a  business  open  to  general  competi- 
tion, calls  for  no  interference  or  assistance  on  the  part  of  the 
state  in  the  working  out  of  its  complicated  business  problem. 

"The  state  does  supervise — and  properly  supervise — the 
concerns  engaged  in  this  business  in  the  same  way  it  super- 
vises banks  and  other  financial  institutions,  for  the  purpose  of 
testing  their  solvency  and  the  integrity  of  their  management. 
This  is  done  presumably  in  the  interest  of  the  great  body  of 
persons  with  whom  such  institutions  deal  and  who,  as  a  class, 
are  not  competent  to  test  their  solvency  or  integrity. 

"Some  states  have  gone  a  step  further  in  prescribing  a 
uniform  contract.  The  reason  for  this  is  apparent  and  per- 
haps sound.  An  insurance  policy  is  necessarily  a  complicated 
and  confusing  contract,  whose  form  readily  lends  itself  as  a 
cover  for  ambiguous  or  even  oppressive  provisions  not  easily 
comprehended  by  the  average  insurer.  To  protect  the  insurers 
from  the  consequences  of  their  own  ignorance  or  carelessness 
in  entering  a  contract  of  so  technical  a  character,  the  state 
endorses  and  enforces  a  particular  form,  which  through  re- 
peated court  constructions,  has  become  fairly  well  understood. 

"The  proposition  that  the  states  step  in  between  the  par- 
ties to  the  contract,  for  the  purpose  of  regulating  the  price  of 
insurance,  or  otherwise  limiting  the  freedom  of  contract  in  the 


44  ADDRESS  OF  MR.  FRANK  E.  LAW 

purchase  and  sale  of  insurance,  is  an  entirely  different  proposi- 
tion and  is  not  justified  by  the  same  or  any  similar  excuse. 

"I  do  not  discuss  the  question  as  to  how  such  a  proposi- 
tion can  be  carried  into  effect  without  offense  to  the  funda- 
mental law,  further  than  to  suggest  that  it  may  not  be  done  by 
attempting,  in  individual  cases,  to  reform,  and,  consequently, 
impair  the  obligation  of  contracts  already  made,  nor  by  com- 
pelling the  insurer  to  write  insurance  upon  terms  which  the 
insurer  is  unwilling  to  assume.  It  must  be  done,  if  at  all, 
through  the  establishment,  by  some  official  rate-making  bureau, 
of  table  rates,  accompanied  by  a  denial  to  the  insurance  com- 
panies of  the  right  to  do  business,  unless  they  limit  their  con- 
tracts by  such  established  tables.  In  other  words,  the  state 
must  equip  itself  to  master  the  technique  of  a  business  which 
has  commanded,  and  still  commands,  the  brains  and  energy  of 
trained  men,  who  have  made  the  subject  a  life  work,  and, 
furthermore,  the  state  must  succeed  in  reducing  the  business 
of  classifying  and  fixing  rates  to  definite  and  arbitrary  stand- 
ards, a  thing  which  the  insurance  companies  have  never  yet 
been  able  to  accomplish  fully.  It  is  difficult  to  comprehend 
why  the  state  should  be  expected  to  secure  service  which  should 
be  more  successful  in  reaching  fair  results  than  the  insurance 
companies.  The  state  is  without  equipment  for  such  work. 
It  cannot  secure  the  services  of  the  men  whose  ability  in  this 
field  commands  more  lucrative  and  congenial  employment. 
There  can  be  no  assurance  to  the  public  that  such  work  would, 
in  the  long  run,  be  handled  with  greater  intelligence  or  in- 
tegrity. Such  control  by  officialdom  of  a  business  whose  com- 
plications and  technicalities  are  almost  unequaled,  must  not 
only  fail  of  any  permanent  benefits  to  the  jnsuring  public,  but 
cause  withdrawal  of  capital  from  the  business,  and  the  state 
will  have  the  opportunity  and  privilege  of  experimenting  with 
its  own  money.'* 


ADDRESS  OF  MR.  S.  H.  WOLFE  45 


IS   THE    STATE    TO    COMPENSATE 
INJURED  WORKMEN  ? 

Address  of  Mr.  S.  H.  Wolfe,  Consulting  Actuary 

Whether  the  State  is  to  undertake  the  employers*  lia- 
bility business  to  the  exclusion  of  private  companies  will 
largely  depend  upon  the  attitude  of  the  companies  and 
their  willingness  to  co-operate  with  the  State  in  the  solu- 
tion of  this  economic  problem. 

The  business  of  issuing  employers'  liability  policies  in 
the  United  States  has  assumed  large  proportions;  it  rep- 
resents over  one-half  of  all  the  liability  business  trans- 
acted. In  these  circumstances  it  is  not  difficult  to  see 
that  the  question  of  State  insurance  is  of  vital  interest  to 
underwriters. 

Epidemics  are  not  confined  to  diseases.  Economic 
truths  and  principles,  although  recognized  for  many  years, 
may  have  been  permitted  to  lie  dormant.  Of  a  sudden 
some  individual  or  community  determines  to  test  prac- 
tically the  theories  which  have  been  advanced  for  years. 
Incidentally,  other  individuals  or  communities  become  im- 
bued with  the  same  ideas,  and  before  long  the  experiment 
becomes  the  accepted  order  of  things,  and  we  wonder  how 
we  were  ever  content  to  get  along  under  the  old  condi- 
tions. 

Such  is  the  history  of  State  insurance.  For  many 
years  governments  elsewhere  have  recognized  the  fact 
that  every  avenue  of  human  activity  was  affected  by  the 
wear  and  tear  on  human  life  caused  by  the  changes  in 
industrial  conditions.  Compensation  for  accidents  occur- 
ring in  certain  selected  occupations  or  trades  has  been 
known  for  over  a  century,  but  Germany  was  the  first 
country  to  institute  a  system  of  accident  compensation 
applicable  to  its  great  body  of  industrial  workers.  We  may 
therefore  point  to  this  movement,  which  took  place  in 
1884,  as  the  beginning  of  the  movement  which  is  now  of 


46  ADDRESS  OF  MR.  S.  H.  WOLFE 

SO  much  interest  to  us.  Other  countries,  quick  to  realize 
the  justice  of  the  idea  and  the  improvement  which  it 
would  bring  to  their  inhabitants,  followed  in  Germany's 
footsteps;  these  enactments  were  not  confined  to  the 
largest  countries,  for  we  find  British  Columbia,  Cape  of 
Good  Hope,  Queensland,  Transvaal,  Alberta  and  Quebec 
among  the  communities  which  have  enacted  appropriate 
laws. 

At  last  in  1910  the  State  of  New  York  awakened  to  its 
responsibility  and  placed  upon  its  statute  books  an  Act 
applicable,  however,  to  eight  hazardous  occupations  only. 
In  the  opinion  of  the  learned  Court  of  Appeals  of  that 
State,  the  Act  was  unconstitutional  and  therefore  void. 
While  the  Act  may  not  have  been  good  law  (the  constitu- 
tionality of  a  similar  statute  in  Washington  has  just  been 
upheld  by  the  Supreme  Court  of  that  State),  it  did  serve 
the  purpose,  I  think,  of  bringing  the  question  squarely 
before  the  people,  not  only  of  New  York,  but  of  the  United 
States  generally.  It  served,  in  my  opinion,  as  a  quickener 
of  the  public  pulse,  as  an  inspiration  to  legislative  bodies, 
and  perhaps  as  a  guide  to  them  in  the  preparation  of  Acts 
which  may  meet  with  a  greater  degree  of  judicial  approval. 
In  a  number  of  the  States  commissions  have  been  ap- 
pointed for  the  purpose  of  studying  methods  of  compen- 
sating those  who  are  injured  during  the  course  of  their 
employment,  and  in  several  of  the  States  we  now  find 
systems  broader  in  their  application  than  the  New  York 
law  and  approaching  in  some  respects  the  European 
standards. 

Heretofore  the  question  of  State  insurance  may  have 
appeared  to  the  companies  transacting  liability  insurance 
in  this  country  as  a  fad,  as  a  form  of  socialistic  doctrine, 
as  an  interference  with  the  right  of  contract,  as  a  dis- 
courager of  thrift,  as  an  encourager  of  malingering  and 
intentional  accidents.  No  matter  what  your  opinion  may 
have  been,  it  is  quite  evident  that  a  majority  of  the  peo- 
ple is  convinced  of  the  justice  of  the  demand  of  those  who 
wish  the  wear  and  tear  on  human  life  to  be  assessed  as  a 
part  of  the  cost  of  production  in  the  same  way  that  the 


ADDRESS  OF  MR.  S.  H.  WOLFE  47 

manufacturer  includes  the  cost  of  the  wear  and  tear  on 
his  machinery.  As  underwriters  you  must  face  that  situ- 
ation and  cut  your  cloth  accordingly.  As  intelligent  citi- 
zens better  equipped  to  deal  with  the  technical  side  of 
this  question  than  are  many  of  the  people  who  frame  the 
statutes,  it  becomes  your  duty  to  consider  this  question 
apart  from  its  immediate  effect  upon  your  business,  in 
order  that  the  maximum  good  and  the  minimum  harm  may 
result  from  the  statutory  enactments. 

We  should,  I  think,  be  fooling  ourselves  did  we  not 
come  to  the  conclusion  that  before  long  we  shall  find  upon 
the  statute  books  of  every  State  some  law  dealing  with 
the  question  of  workmen's  compensation,  and  that  the 
treatment  will  be  along  the  lines  of  the  enactments  to  be 
found  at  the  present  time  in  European  countries.  When 
that  time  comes  the  funds  for  the  purpose  of  compen- 
sating the  injured  will  be  derived  in  one  of  two  ways: 

(a)  The  State  will  collect  from  the  employers  a  cer- 
tain percentage  of  their  payrolls  and  will  provide  the 
machinery  necessary  for  the  investigation  of  claims  and 
the  payments  of  benefits. 

(b)  The  State  will  content  itself  with  the  enactment 
of  laws  specifying  the  basis  of  compensation,  and  will 
permit  the  employer  to  distribute  the  benefits  in  accord- 
ance with  such  enactment. 

Before  discussing  the  advantages  and  disadvantages, 
the  merits  and  demerits  of  the  foregoing,  it  may  prove 
profitable  for  us  to  consider  a  few  of  the  facts  which 
have  led  to  the  present  situation: 

Employers'  liability  insurance  was  the  natural  and  log- 
ical outgrowth  of  industrial  conditions.  When  the  num- 
ber of  employees  working  for  an  employer  was  small,  the 
question  of  compensation  for  injuries  was  comparatively 
simple.  He  whose  carelessness  caused  the  injury  should 
be  held  responsible  for  the  damage  resulting  therefrom, 
is  a  doctrine  which  in  simple  communities  is  easy  of 
enforcement,  works  no  hardship  and  creates  no  unjust  con- 
ditions. In  such  circumstances  it  is  not  impossible  to 
follow  the  reasoning  which  held  that  an  employer  should 


1 


48  ADDRESS  OF  MR.  S.  H.  WOLFE 

not  be  held  responsible  for  injuries  caused  by  the  negli- 
gence of  a  fellow  employee;  it  is  not  unreasonable  in 
these  circumstances  to  believe  that  an  employee  should 
be  expected  to  appreciate  the  risks  inherent  in  and  pecu- 
liar to  the  employment  which  he  has  elected  to  accept. 
When  the  workshop  was  small  it  was  not  unreasonable 
to  hold  that  the  lack  of  safety  devices  was  realized  before 
the  employment  was  accepted,  and  that  the  employer  should 
not  be  held  responsible  for  his  failure  to  install  these  safe- 
guards, especially  if,  as  in  many  cases,  he  worked  side  by 
side  with  the  employee. 

But  all  of  these  conditions  have  changed.  No  longer 
is  the  old  intimate  relationship  between  the  employer  and 
the  employee  maintained;  the  birth  of  corporations  created 
conditions  not  dreamt  of  in  the  day  of  the  individual  em- 
ployer. The  development  of  the  use  of  power  in  plants, 
the  increase  in  the  number  of  employees  in  each  plant  and 
the  general  labor  conditions  have  created  changes  to  which 
it  seems  the  law  was  the  tardiest  to  give  recognition;  in 
fact  in  some  of  our  States  at  the  present  time  employees 
are  permitted  to  plead  the  defences  which  today  no  right 
thinking  man  considers  applicable  in  the  slightest  degree 
to  industrial  conditions.  Doctrines  which  were  just  and 
equitable  a  century  ago  are  inequitable  and  obnoxious 
today. 

What  was  more  logical,  therefore,  than  the  creation  of 
the  employers'  liability  insurance  company?  It  served  a 
two-fold  purpose,  first,  by  distributing  the  losses  over  a 
large  number  of  risks  it  enabled  the  individual  insurer, 
by  the  payment  of  a  reasonable  premium,  to  guard  against 
the  disastrous  effects  of  an  unusually  severe  accident,  and, 
second,  it  placed  at  the  disposal  of  the  insured  a  highly 
developed  machine  skilled  in  the  application  of  those  de- 
fences which  the  law  recognized  as  a  bar  to  recovery  by 
the  workmen  in  the  event  of  injury.  By  this  second 
reason  I  intend  to  cast  no  reflection  upon  the  motives  of 
the  liability  insurance  company  or  of  its  insured.  The 
statutes  deal,  or  are  supposed  to  deal,  with  absolute  jus- 
tice and  impartiality  toward  all  parties.     Certainly  no  one 


ADDRESS  OF  MR.  S.  H.  WOLFE  49 

can  be  condemned  or  properly  criticised  for  insisting  upon 
those  rights  which  are  guaranteed  to  him  by  the  law. 

Perhaps  it  is  not  so  remarkable  after  all  that  the  United 
States  in  comparison  with  the  European  countries  has  been 
backward  in  recognizing  the  necessity  for  a  change.  As 
shown  previously,  it  was  not  until  1884  that  Germany 
enacted  its  general  workmen's  compensation  law,  although 
as  far  back  as  1871  its  modification  of  the  liability  laws 
served  to  remove  many  of  the  hardships  which  had  been 
felt  by  injured  workmen.  Notwithstanding  our  vigor  and 
our  size,  we  are  one  of  the  youngest  in  the  family  of  nations, 
and  we  may  not  have  experienced  the  necessity  for  the 
changes  quite  as  early  as  did  the  European  countries.  It 
is  now  quite  evident,  however,  that  as  we  have  awakened 
to  the  necessity  of  a  change,  we  are  prepared  to  attack  the 
subject  in  our  characteristic  hasty  fashion,  with  the  result 
that  unless  we  proceed  with  due  care  and  caution  we  shall 
find  ourselves  burdened  with  obnoxious  requirements, 
which  in  their  way  may  prove  as  unfortunate  as  the  con- 
ditions which  they  aim  to  remedy. 

The  activities  in  some  of  the  United  States  seem  tc 
have  taken  two  distinct  forms: 

1.  The  abolition  of  the  usual  defences  which  have 
served  to  prevent  the  injured  workman  recovering  dam- 
ages from  his  employer  in  the  event  of  accident,  and 

2.  The  inauguration  of  some  State  insurance  plan 
whereby  the  workman  is  compensated  for  accidents,  no 
matter  who  is  responsible  for  their  occurrence,  although 
if  the  employer  be  enabled  to  prove  conclusively  that  the 
injury  was  intentionally  sustained  he  is  relieved  in  such 
cases  from  his  liability. 

There  is  little  to  be  said  in  favor  of  the  first  of  these 
propositions.  In  attempting  to  deprive  the  employer  of 
the  usual  defenses  it  does  nothing  more  than  to  encourage 
litigation  without  making  a  definite  provision  for  the  bet- 
terment of  the  injured  workman  and  his  dependents.  The 
history  of  accident  litigation  in  this  country  is  not  a  par- 
ticularly pleasing  one.  A  claim  for  indemnity  is  made, 
the  attorney  for  the  plaintiff  bends  every  effort  to  work 


50  ADDRESS  OF  MR.  S.  H.  WOLFE 

upon  the  sympathy  of  the  jury  for  the  purpose  of  obtain- 
ing a  large  verdict,  while  the  attorney  for  the  defendant 
uses  all  of  his  professional  skill  in  minimizing  the  effects 
of  the  injury  and  the  liability  of  his  client;  the  case  goes 
to  the  jury  and  the  size  of  the  verdict  depends  upon  the 
way  in  which  its  mind  has  been  influenced  by  the  argu- 
ments of  counsel  and  by  its  own  prejudices  and  beliefs. 
The  damage  caused  by  an  accident  may  mean  not  only 
that  a  productive  member  of  society  has  been  rendered 
unproductive,  but  other  relationships  may  have  been  seri- 
ously affected,  the  general  public  being  interested,  for  in- 
stance, in  the  wife  and  minor  children  being  placed  in  a 
position  whereby  they  will  not  become  public  charges.  The 
settlement  of  a  claim  for  damages,  therefore,  of  this  kind 
is  too  sacred  and  important  a  matter  to  be  entrusted  to  the 
whims  of  a  juryman  and  his  natural  liability  to  be  affected 
by  cant  and  prejudice. 

From  the  standpoint  of  right- and  justice,  therefore,  it 
is  evident  that  we  should  not  be  content  with  merely  hold- 
ing the  employer  liable  for  accidents  and  then  requiring  the 
injured  workman  to  establish  his  claim  in  court;  from  the 
standpoint  of  the  underwriter  it  is,  in  these  circumstances, 
manifestly  impossible  to  fix  rates  with  any  degree  of  cer- 
tainty. 

From  every  viewpoint  it  becomes  desirable,  therefore, 
to  take  care  of  this  condition  by  the  enactment  of  pro- 
visions which  will  make  the  amount  of  compensation 
directly  ascertainable  when  once  the  question  of  respon- 
sibility has  been  established.  If  the  statute  provide  that 
all  injuries  occurring  during  employment,  except  those 
which  were  willfully  incurred  by  the  workman  or  sus- 
tained during  intoxication,  were  to  be  compensated  for 
according  to  a  definite  scale,  we  should  be  confronted 
only  with  the  necessity  of  establishing  the  liability  for 
the  accident.  If  according  to  such  a  law  the  employer 
be  liable,  the  question  of  the  benefits  to  be  paid  would  be 
automatically  settled  and  the  most  prolific  source  of  un- 
certainty and  trouble  would  thereby  disappear. 


ADDRESS  OF  MR.  S.  H.  WOLFE  5 1 

It  must  be  apparent,  therefore,  that  companies  have 
nothing  to  lose  and  everything  to  gain  by  the  enactment 
of  a  workmen's  compensation  law  containing  a  schedule 
of  benefits  to  be  paid  in  the  event  of  the  employer  being 
liable  for  the  injury.  As  all  insurance  is  based  upon  the 
idea  of  the  distribution  of  the  losses  of  the  few  among 
the  many,  and  since  an  insurance  company  is  merely  the 
vehicle  of  distribution,  it  follows  that  if  the  extent  and 
nature  of  a  risk  be  known  an  approximately  correct  pre- 
mium can  be  computed. 

That  the  introduction  of  such  a  law  ought  to  be  wel- 
comed by  the  underwriter  is  indicated  by  an  analysis  of 
some  of  those  problems  which  have  demanded  his  atten- 
tion during  recent  years.  I  think  I  am  correct,  in  saying 
that  the  most  important  question  with  which  liability  com- 
panies and  supervising  officials  have  had  to  deal  during  that 
time  is  the  question  of  adequate  loss  reserves.  To  my  mind 
difficulty  has  been  added  to  an  otherwise  troublesome  ques- 
tion by  the  injection  of  the  element  of  uncertainty  in  liti- 
gated cases.  The  tendency  of  juries  to  render  verdicts  for 
larger  and  larger  amounts  in  personal  injury  cases  has  been 
noted,  and  in  consequence  it  has  been  found  that  the  cost 
of  disposing  of  the  litigated  cases  is  much  larger  than  had 
been  originally  contemplated.  This  situation  naturally  has 
an  important  bearing  on  the  subject  of  liability  loss  re- 
serves. With  a  law  such  as  I  have  indicated  above,  this 
element  of  uncertainty  would  disappear  and  the  value  of 
every  claim  would  be  definitely  known  and  the  proper  re- 
serve could  be  thereby  accumulated.  In  the  calculation  for 
determining  the  premium  necessary  to  be  charged,  the 
underwriter  would  deal  only  with  the  number  of  accidents 
which  would  probably  occur  and  would  not  be  required  to 
provide  for  the  margin  of  safety  now  required  for  the  flex- 
ible, variable  and  uncertain  quantity  which  may  be  char- 
acterized as  "jury  recoveries." 

Assuming  then  that  the  interests  of  the  workman,  the 
employer,  the  underwriter  and  the  general  public  will  best 
be  served  by  the  enactment  of  a  law  providing  for  a  definite 
scale  of  benefits  in  the  event  of  injury,  how  shall  the  con- 


5^  ADDRESS  OF  MR.  S.  H.  WOLFE 

tributions  necessary  for  that  purpose  be  collected?  I  have 
pointed  out  the  two  possible  methods.  Let  us  examine 
them  in  detail. 

The  first  method  involves  the  necessity  of  the  State 
fixing  the  necessary  rates,  attending  to  the  collection  of 
the  assessments,  ^investigating  the  conditions  surrounding 
each  claim  and  finally  paying  the  benefits  to  the  claimant. 
This  method  is  required  in  but  few  of  the  European  coun- 
tries. I  doubt  whether  the  American  people  are  ready 
to  create  the  large  and  powerful  political  machine  which 
would  be  rendered  necessary  by  this  method,  or  do  I  think 
that  we  are  ready  to  designate  the  Government  as  a  de- 
pository for  the  large  contributions  which  would  be  re- 
quired. Competition  would  be  eliminated,  and  it  requires 
no  demonstration  on  my  part  to  show  the  benefits  of  com- 
petition in  cases  of  this  kind.  Private  companies  would 
be  enabled  to  provide  a  more  effective  investigation  of 
claims  than  would  the  State,  and  the  only  possible  gov- 
ernmental advantage — that  of  expenses  of  administration — 
is  a  question  the  discussion  of  which  I  should  like  to  defer 
for  a  few  minutes. 

The  second  method  limits  the  State  to  the  designation 
of  the  benefits  to  be  paid  under  certain  conditions,  and 
leaves  with  the  employer  the  question  of  distributing  the 
benefits.  It  must  be  apparent  to  all  that  without  the  crea- 
tion of  proper  safeguards,  grave  injustice  might  be  worked 
to  the  claimant,  the  solvent  and  responsible  employer  and 
the  public  generally,  for  if  we  require  no  evidence  of  re- 
sponsibility we  are  opening  the  way  to  serious  evils.  As 
the  result  of  an  extensive  accident,  the  number  of  claims 
which  the  employer  would  have  to  meet  might  be  so  large 
as  to  endanger  his  financial  condition;  he  would  be  unable 
to  meet  the  payment  to  his  injured  workmen  required  by 
law;  in  consequence,  therefore,  they  would  become  public 
charges  or  would  be  deprived  of  the  benefits  to  which  the 
law  states  they  are  entitled,  and  which  under  similar  con- 
ditions their  injured  fellow  workmen  in  the  employ  of  a 
more  prosperous  employer  would  receive. 


ADDRESS  OF  MR.  S.  H.  WOLFE  53 

How  then  shall  we  so  frame  our  statutes  as  to  obtain 
the  maximum  good  and  the  elimination  of  the  evils  just 
pointed  out? 

I  am  of  the  opinion  that  at  the  present  time  the  maxi- 
mum good  is  to  be  attained  not  by  requiring  the  State 
to  become  the  insurer,  but  by  placing  upon  the  statute 
books  a  law  which  would  embody  the  following  features: 

First. — A  statement  of  the  circumstances  under  which 
the  employer  becomes  responsible  for  an  accident  during 
the  hours  of  employment. 

Second. — A  definite  scale  of  benefits  to  be  paid  by  the 
employer  when  he  is  responsible. 

Third. — A  requirement  that  every  employer  to  whom 
the  law  applies  shall  file  with  the  commission,  mentioned 
hereafter,  satisfactory  evidence  that  his  responsibility  for 
the  payment  of  benefits  for  which  he  becomes  responsible 
is  guaranteed  by  a  corporation  authorized  to  transact  the 
business  of  liability  insurance. 

Fourth. — The  appointment  of  a  commission  (some  of 
the  members  of  which  should  have  a  knowledge  of  the 
technical  side  of  employers'  liability  insurance)  which 
would  classify  the  risks,  and  would,  after  the  necessary 
investigation,  fix  the  minimum  and  the  maximum  rate 
which  would  be  charged  by  any  corporation  authorized 
to  furnish  the  guarantees. 

Fifth. — A  provision  that  the  commission  may,  after 
hearing  evidence,  order  the  installation  of  proper  safety 
devices  in  order  that  accidents  may  be  prevented  as  far 
as  possible. 

Sixth. — A  provision  that  those  employers  having  more 
than  a  certain  number  of  employees  may,  instead  of  be- 
coming insured  in  a  private  company,  elect  to  deposit  with 
the  State  the  minimum  premium  required  by  the  commis- 
sion, which  deposit  is  to  be  increased  from  time  to  time  as 
required  by  the  commission  in  order  to  cover  the  present 
values  of  benefits  to  be  paid,  and  is  to  be  withdrawn  on 
filing  with  the  commission  satisfactory  evidence  that  the 
deposit  is  not  required  for  the  payment  of  claims. 


54  ADDRESS  OF  MR.  S.  H.  WOLFE 

Within  the  limits  of  a  brief  talk  such  as  this  one  is,  it 
is  impossible  to  deal  with  all  the  details  of  so  important 
a  subject,  but  the  skeleton  which  I  have  just  outlined  will 
serve,  I  think,  to  indicate  the  idea  which  is  uppermost  in 
my  mind. 

Why  should  Jhe  State  be  empowered  to  fix  the  maxi- 
mum and  minimum  rates  which  may  be  charged? 

It  must  be  admitted  that  the  whole  scheme  of  the  pro- 
posed protection  will  fall  to  the  ground  unless  the  com- 
pany when  called  upon  to  pay  the  claims  will  be  in  a 
satisfactory  financial  position  to  do  so.  In  one  or  two  of 
the  countries  abroad  a  certain  sum  is  exacted  each  year 
from  employers  for  the  purpose  of  protecting  the  State 
against  insolvencies.  The  same  result  could  be  obtained 
if  the  State  were  in  a  position  to  satisfy  itself  as  to  the 
sufficiency  of  the  guarantors.  The  best  and  simplest  way 
to  enable  it  to  guard  against  future  insolvencies  is  to  re- 
quire that  the  company  shall  charge  a  premium  commen- 
surate with  the  risk.  In  other  words,  that  no  company 
shall  be  permitted  to  hazard  the  plan  by  injudicious  or 
ignorant  underwriting.  Competition  is  a  desirable  thing, 
but  it  must  not  be  carried  to  that  point  where  the  pro- 
tection is  furnished  below  cost  and  the  safety  of  the  entire 
structure  thereby  endangered. 

Why  should  the  State  be  permitted  to  regulate  the 
fnaximum  rate  which  may  be  charged?  It  must  be  evi- 
dent to  all  of  us  that  the  expenses  of  administering  the 
business  have  been  too  great — a  condition  not  peculiar  to 
liability  insurance.  In  life  insurance,  for  instance,  the  same 
conditions  were  found,  and  we  have  attempted  to  correct 
the  evil  in  two  different  ways:  In  New  York,  for  instance, 
the  law,  without  attempting  to  fix  the  maximum  premiums 
which  may  be  charged  by  the  companies,  has  limited  the 
amount  which  may  be  used  for  expenses  in  any  particular 
year;  in  Wisconsin,  on  the  other  hand,  the  law  limits 
the  premium  which  may  be  charged  by  any  life  company 
for  any  particular  form  of  policy.  Both  New  York  and 
Wisconsin  provide  for  the  penalizing  of  any  company 
which  would  be  so  unmindful  of  its  own  interests  as  to 


ADDRESS  OF  MR.  S.  H.  WOLFE  55 

charge  too  low  a  premium,  and  fix  the  minimum  as  the 
net  mathematical  premium  required  to  furnish  the  insur- 
ance. 

It  will  be  seen,  therefore,  that  my  proposal  to  estab- 
lish a  maximum  and  a  minimum  limit  for  the  rates  to  be 
charged  is  not  so  radical,  but  its  counterpart  may  be 
found  in  other  lines  of  insurance. 

An  insurance  company  is  entitled  to  charge  a  premium 
which  is  sufficient  to  provide  for  the  following  elements: 

(a)  An  amount  necessary  to  pay  for  the  losses. 

(b)  The  economical  administration  of  its  business. 

(c)  A  fair  return  to  its  stockholders  whose  capital 
has  been  invested  as  a  guarantee  fund. 

No  company  should  be  permitted  to  charge  less  than 
the  amount  required  to  pay  its  losses,  and  no  use  of  any 
portion  of  that  amount  for  expense  or  dividend  purposes 
should  be  tolerated. 

The  question  of  expenses  is  one  which  should  not  be 
lightly  dismissed.  If  I  were  asked  to  place  my  finger 
upon  the  one  expenditure  which  has  been  excessive  in 
the  history  of  private  companies,  I  would  unquestionably 
point  to  the  item  of  procurement  expenses.  Again,  we 
find  that  liability  insurance  is  not  alone  in  this  matter, 
for  the  one  item  which  is  in  need  of  retrenchment  in  all 
forms  of  insurance  is  the  one  providing  for  the  soliciting 
of  the  business.  In  comparing  the  expenses  of  private 
companies,  however,  with  the  expenses  of  the  govern- 
mental departments  abroad,  we  should  not  be  misled  by 
statistics  which  purport  to  give  the  expenses  of  adminis- 
tration in  those  places.  If  we  analyze  them  carefully  I 
think  we  will  find  that  many  items  which  should  have 
been  charged  to  the  expenses  of  the  plan  have  been  min- 
gled with  the  expenses  of  other  branches  of  the  State  Gov- 
ernment and  their  identity  therefore  lost. 

It  is  a  question  whether  at  the  present  time  our  polit- 
ical machinery  is  quite  prepared  to  burden  itself  with  this 
additional  load.  If  we  could  be  assured  of  the  fact  that 
the  Government  employees  having  State  insurance  in 
charge  would  bring  to  their  work  4;he  same  energy  and 


56  ADDRESS  OF  MR.  S.  H.  WOLFE 

intelligence  which  is  now  required  of  employees  in  pri- 
vate companies,  the  question  would  be  in  a  fair  position 
to  be  solved,  but  at  the  present  time  I  am  of  the  opinion 
that  we  in  this  country  are  not  equipped  to  have  the  State 
undertake  the  exclusive  conduct  of  the  employers'  liability 
business.  This,  however,  is  merely  a  matter  of  develop- 
ment, and  if  the  attitude  of  the  private  companies  is  such 
as  to  force  that  upon  the  State,  I  believe  that  the  State  can 
and  will  find  a  way  to  handle  the  proposition. 


ADDRESS  OF  MR.  J.  SCOFIELD  ROWE  57 


COMPENSATION  FOR  ACCIDENTS  TO  WORK- 
PEOPLE—SHOULD IT  BE  ADMINISTERED 
BY  THE  STATE? 

Address  of  Mr.  J.  Scofield  Rowe 

Vice-President,  Aetna  Lite  Insurance  Company 

1.  Why  and  by  whom  is  State  Insurance  advocated f 

2.  Insurance    Companies    blamed    for    conditions    which 

called  them  into  existence  and  for  which  they  are 
in  no  way  responsible.  ^ 

3.  Possible  Constitutional  Objections. 

4.  Political,  social  and  economic  dangers. 

5.  Present  deplorable  conditions  in  Germany. 

6.  English  methods  adaptable  io  this  country. 

Much  will  have  been  accomplished  if  the  numerous 
articles  and  editorials  that  have  appeared  in  newspapers,  jour- 
nals and  magazines  on  the  subject  of  workmen's  compen- 
sation succeed  in  arousing  the  American  public  to  take  a 
serious  and  intelligent  interest  in  a  question  which  affects 
the  community  at  large  and  especially  business  interests  as 
vitally  as  any  question  that  confronts  the  people  of  this  country 
at  the  present  time. 

The  earnest  attention  now  being  given  in  most  of  the 
States  to  the  question  of  how  best  to  deal  with  industrial  acci- 
dents has  given  rise  to  much  discussion  regarding  the  best 
method  of  administering  workmen's  compensation  insurance. 

There  are  some  who  contend  that  the  business  of  insur- 
ance in  this  respect  should  be  undertaken  by  the  State,  and  as 
this  phase  of  the  question  is  apt  to  develop  in  every  State 
where  a  workmen's  compensation  plan  is  suggested  it  is  well 
to  consider  whether  a  law  providing  for  State  insurance  would 
be  free  from  constitutional  objections  and  conserve  the  best 
interests  of  employers,  employees  and  society  as  a  whole. 

First,  let  us  consider: 


58  ADDRESS  OF  MR.  J.  SCOFIELD  ROWE 

Why  and  by  Whom  Is  State  Insurance  Advocated? 

The  true  socialist  favors  it  on  general  principle,  and  is 
always  on  the  alert  to  advance  his  pet  theories  of  paternalism 
in  government  and  community  of  interest. 

He  professes  to  believe  in  the  extension  of  the  preroga- 
tives of  the  government  even  at  the  expense  of  individual 
enterprise,  and  hopes  thereby  to  retard  the  growth  of  indi- 
vidualism and  secure  a  more  equitable  distribution  of  the  bene- 
fits to  be  derived  from  the  country's  wealth  and  resources. 

The  politician  clamors  for  it  ostensibly  in  the  interests  of 
either  capital  or  labor,  whichever  master  he  happens  to  be  serv- 
ing at  the  time,  but  really  for  the  sole  purpose  of  strengthen- 
ing the  hold  of  a  powerful  political  machine  on  the  business 
interests  of  the  country  for  personal  gain  and  the  additional 
poHtical  power  that  is  expected  to  be  derived  from  such  an  or- 
ganization. 

The  misguided  reformer  urges  it  because  his  attention  has 
been  called  to  the  great  economic  waste  resulting  from  present 
unsatisfactory  conditions;  and  having  heard  that  only  about 
30  or  35  per  cent,  of  the  amount  paid  for  liability  insurance 
actually  reaches  the  injured  he  jumps  at  the  conclusion  that 
insurance  companies  are  a  lot  of  cold-blooded  robbers,  who  are 
deliberately  appropriating  to  their  own  use  many  millions  a 
year  that  properly  belong  to  the  injured  workmen  and  to  the 
country's  widows  and  orphans;  hence  State  insurance  coupled, 
if  possible,  with  compulsory  compensation  is  the  only  remedy. 

So  far  there  has  actually  been  no  real  call  for  State 
insurance  of  industrial  accidents  on  the  part  of  either  em- 
ployers or  employees,  the  employer's  principal  complaint  being 
that  he  should  not  alone  be  called  upon  to  bear  the  entire  cost 
of  accidents  to  his  employees,  while  employees  are  insistent 
in  their  demand  that  compensation  should  be  paid  for  all  acci- 
dents regardless  of  fault. 

Insurance   Companies   Blamed  for   Conditions  for   Which 
They  Are  in  No  Way  Responsible. 

Now  liability  insurance  companies  were  called  into  exist- 
ence because  of  these  conditions  and  are  in  no  way  respon- 
sible therefor. 


ADDRESS  OF  MR.  J.  SCOFIELD  ROWE  59 

Socialists,  politicians  and  alleged  reformers,  all  candidates 
for  notoriety,  and  some  for  graft,  have  no  compunction  in  mis- 
leading and  deceiving  the  public;  if  so  by  their  purpose  is 
accomplished. 

We  have  a  striking  example  of  this  in  the  recent  compul- 
sory compensation  and  State  political  insurance  scheme 
effective  in  the  State  of  Washington. 

I  shall  not  call  it  a  law  because  scheme  is  more  appro- 
priate, and  to  become  a  law  it  ought  to  be  lawful^  which  I 
firmly  believe  this  scheme  is  not. 

We  have  had  conclusive  evidence  that  had  it  not  been 
for  the  fact  that  the  public  generally,  and  the  Legislature  in 
the  State  of  Washington  more  particularly,  were  deliberately 
deceived  and  misled  into  believing  that  the  Casualty  Insurance 
Companies  were  directly  responsible  for  the  unsatisfactory 
conditions  existing  in  connection  with  the  proper  indemnifying 
of  employees  for  industrial  accidents,  the  Washington  State 
political  scheme  would  never  have  been  passed. 

The  real  facts  are  that  Liability  Insurance  Companies 
are  merely  the  result  and  not  the  cause  of  existing  unsatis- 
factory conditions. 

In  other  words.  Liability  Insurance  Companies  were 
brought  into  existence  by  reason  of  the  crystallization  of  public 
opinion  in  support  of  claim  making,  which  obviously  developed 
the  need  on  the  part  of  employers  for  insurance  protection 
against  law  suits  and  the  uncertain  damages  resulting  there- 
from. 

Up  to  the  present  time  Casualty  Insurance  Companies 
have  never  been  afforded  an  opportunity  in  this  country  to 
insure  employers  against  the  loss  resulting  from  industrial 
accidents  under  a  workmen's  compensation  law  designed  to 
require  the  payment  of  indemnities  for  all  accidents  regard- 
less of  fault,  and  it  will  be  obvious  to  the  experienced  lia- 
bility underwriter  that  the  administration  of  insurance  against 
loss  resulting  from  industrial  accidents  under  conditions  im- 
posing such  loss  upon  employers  without  regard  to  negligence 
could  be  handled  and  administered  by  private  companies  far 
more  satisfactorily  and  with  much  less  expense  than  it  could 
possibly  be  administered  by  any  State  Insurance  Department, 


6o  ADDRESS  OF  MR.  J.  SCOFIELD  ROWE 

interwoven  and  controlled  as  it  is  sure  to  be  by  whichever 
political  party  may  be  in  power. 

Everyone  who  has  given  the  subject  any  thought  realizes 
that  so-called  employers'  liability  does  not  offer  the  ideal  way 
of  dealing  with  the  consequences  of  industrial  accidents,  and 
that  a  system  of  compensation  for  such  accidents,  which  will 
in  a  measure  fix  their  cost  and  make  it  as  much  a  part  of  the 
cost  of  the  product  as  is  the  damage  or  destruction  of  material 
or  the  wear  and  tear  upon  machinery,  would  be  far  prefer- 
able. 

There  is  no  question  that  from  a  social  and  economic 
standpoint  the  workman  or  his  family  should  receive  reason- 
able compensation  for  injuries  which  result  in  his  disability 
or  death,  otherwise  the  burden  is  apt  to  be  shifted  ultimately 
from  the  cost  of  the  product,  where  it  belongs,  to  the  com- 
munity in  the  most  undesirable  form  of  charity. 

There  is  no  question  that  should  such  compensation  be 
required  by  law  employers  would  be  seriously  embarrassed  if 
left  to  bear  the  burden  alone. 

The  loss  must,  therefore,  be  equalized  and  the  burden 
distributed  by  some  method  of  insurance  which  would  enable 
the  stronger  and  weaker  employers  to  ofTer  the  same  adequate 
guarantee  that  each  accident  shall  be  properly  compensated 
without  the  burden  falling  too  heavily  upon  any  one  employer 
or  industry  or  part  thereof. 

Possible  Constitutional  Objections. 

There  is  apparently  no  constitutional  objection  that  could 
prevent  a  State  government  from  establishing  a  Department 
of  Insurance  for  the  actual  collection  of  premiums  and  dis- 
tribution of  losses  so  long  as  the  question  of  patronage  of  such 
a  department  is  left  optional  with  its  citizens,  but  no  one 
who  has  given  the  subject  any  thought  would  expect  such  a 
department  to  succeed  in  competition  with  experienced  private 
insurance  organizations. 

Any  attempt,  however,  at  compelling  a  certain  class  of 
citizens  to  insure  with  a  State  Insurance  Department  against 
any  of  the  chance  hazards  or  risks  of  the  business  in  which 
one  happens  to  be  engaged,  such  as  is  now  being  attempted 


ADDRESS  OF  MR.  J.  SCOFIELD  ROWE  6l 

in  the  State  of  Washington,  is,  we  believe,  a  direct  violation 
of  the  Federal  Constitution,  Amendment  14,  Section  i, 
namely : 

"Nor  shall  any  State  deprive  any  person  of  life,  lib- 
erty or  property,  without  due  process  of  law." 

The  employer  who  prefers  to  manage  his  own  business 
and  to  insure  or  not  to  insure  the  chance  financial  risks  of 
his  own  private  business  operations,  whatever  they  may  be, 
is  most  certainly  deprived  of  both  liberty  and  property  when 
he  is  compelled  to  contribute  to  a  State  fund  from  which  is  paid 
the  chance  losses  from  the  private  business  operations  of  others 
and  in  which  he  has  no  direct  personal  interest. 

The  Constitution  of  the  United  States,  and  many  if  not 
all  of  the  States,  provide  that  the  right  of  trial  by  jury  shall 
be  inviolate.  How  then  can  a  law  stand  that  denies  this  right 
to  any  person,  employee  or  otherwise,  who  may  be  seriously 
injured  through  the  negligence  of  another,  even  though  it  offer 
as  a  substitute  a  sum  fixed  by  law  as  compensation,  and  which 
may  or  may  not  be  adequate  for  the  damage  sustained? 

Is  it  proper  or  in  the  interests  of  justice  that  any  set 
of  lawmakers  should  undertake  in  advance  of  the  accident 
causing  the  injury  or  loss  of  life  to  place  a  fixed  price  upon 
the  lives  and  limbs  of  its  citizens  and  at  the  same  time  deny 
them  all  other  rights? 

We  contend  that  if  more  laws  are  needed  in  this  country 
to  correct  existing  evils  they  should  seek  to  make  it  easy  for 
one  and  all  to  obtain  justice  with  all  possible  economy  and 
despatch,  and  not  to  make  justice  more  than  ever  inaccessible 
by  a  glaring  infringement  upon  the  personal  rights  and  lib- 
erties of  its  citizens. 

While  the  Compulsory  State  Insurance  Law  of  Wash- 
ington has  recently  been  upheld  by  the  State  Supreme  Court 
this  decision  was  obviously  obtained  through  a  friendly  suit 
and  without  there  being  any  actual  parties  at  interest,  and 
Judge  J.  Chadwick,  while  concurring  with  the  present  de- 
cision, adds  the  following  comment: 

"This    proceeding    is    prosecuted    by   the    relator,    a 
simple  contract  creditor  of  the  State.    There  is  no  party 


62  ADDRESS  OF  MR.  J.  SCOFIELD  ROWE 

in  interest  before  us  whose  interest  is  to  challenge  the 
Act  of  the  Legislature.  This  is  a  moot  case  pure  and 
simple,  and  the  right  of  the  relator  to  recover  is  in  no 
way  affected  by  the  constitutional  questions  raised  by  the 
parties  and  discussed  by  the  Court. 

"No  one  will  contend  that  it  is  of  any  concern  to 
a  furniture  dealer  who  is  seeking  to  collect  his  account 
whether  an  injured  workman  is  to  be  deprived  of  the 
right  to  submit  his  cause  to  a  jury  of  his  peers. 

"The  principle  is  too  important  to  be  mooted  by  the 
Court,  for  some  day  a  real  party  of  interest  will  be 
before  us.  Either  an  employer  who  feels  aggrieved  by 
the  operation  of  the  law  or  a  workman  who  has  re- 
ceived injuries  which  the  accepted  schedules  will  not 
compensate,  and  we  will  be  put  to  the  duty  of  deciding 
the  case  without  reference  to  our  present  decision  so  that 
the  Federal  questions  involved  may  pass  for  final  hearing 
to  the  Supreme  Court  of  the  United  States." 

Robert  H.  Montgomery,  of  the  Harvard  Law  School,  in 
commenting  upon  the  constitutionality  of  the  new  Ohio  Com- 
pensation and  State  Insurance  Law  (Ohio  Law  Reporter, 
October  9th),  quotes  from  many  important  legal  decisions, 
among  which  the  following  may  shed  some  light  on  the  sub- 
ject: 

"The  sovereign  power  of  the  State  is  vested  in  three 
departments — legislative,  executive  and  judicial.  What- 
ever power  is  vested  in  either  the  executive  or  the  judicial 
departments  cannot  be  exercised  by  the  Legislature." 

"The  judicial  power  of  the  State  cannot  be  en- 
croached upon  by  the  legislative  department.  It  may  fur- 
nish remedies,  but  the  courts  alone  can  enforce  them." 

"The  power  conferred  upon  the  General  Assembly 
is  legislative  power,  and  that  body  is  expressly  prohibited 
from  exercising  any  judicial  power  which  is  not  ex- 
pressly conferred  by  the  Constitution." 

"Judicial  power  is  not  exercised  in  the  constitu- 
tional sense  by  a  referee  in  determining  facts  in  a  cause 
submitted  to  him,  but  by  the  Court  in  giving  judgments." 

"An  Act  of  the  Legislature  authorizing  contribu- 
tions to  be  levied  for  a  mere  private  purpose  would  not 
be  a  law,  but  a  judicial  sentence  and  not  within  the  legi- 
timate scope  of  legislative  authority." 


ADDRESS  OF  MR.  J.  SCOFIELD  ROWE  63 

"The  Legislature  has  no  power  to  substitute  boards 
of  arbitration  for  the  Courts  without  the  consent  of  the 
parties." 

"The  Legislature  has  no  power  to  establish  rules 
which  under  the  pretense  of  regulating  the  presentation 
of  evidence  so  far  as  altogether  to  preclude  a  party  from 
exhibiting  his  rights." 

"A  law  which  directly  accomplishes  a  like  result  by 
imposing  such  conditions  upon  the  right  to  appeal  for 
judicial  relief  as  works  an  abandonment  of  the  right 
rather  than  face  the  conditions  upon  which  it  is  offered 
or  may  be  obtained  is  also  unconstitutional." 

"In  our  system  of  government  the  power  to  establish 
police  regulations  has  been  left  with  the  State  govern- 
ments and  may  be  exercised  by  the  Legislatures  accord- 
ing to  their  judgment  and  discretion  in  any  manner  not 
inconsistent  with  or  repugnant  to  the  Federal  or  re- 
spective State  constitutions." 

"While  therefore  a  broad  discretion  is  given  to  the 
Legislature  to  provide  for  the  general  welfare,  it  neces- 
sarily is  not  any  arbitrary  or  unlimited  discretion,  for  if 
it  were  beyond  judicial  control  or  review  it  would  amount 
to  a  practical  abrogation  of  all  constitutional  guarantees 
of  personal  rights." 

Political  and  Social  Economic  Dangers. 

The  prerogatives  of  our  form  of  Federal  and  State  gov- 
ernment are  primarily  to  govern,  and  these  prerogatives  in- 
volve : 

1.  The  passage  of  such  laws  as  may  seem  wise  and  nec- 

essary to  properly  govern  its  people  and  insure  equal 
opportunity,  protection  and  a  square  deal  to  all  of  its 
citizens. 

2.  The  establishment,  maintenance  and  operation  of  such 

executive  and  judicial  departments  by  the  State  as 

are  necessary  to  the  administration  and  enforcement 

of  its  laws. 

No  one  but  the  socialist,    therefore,    will  deny  that  it  is 

unwise,  improper  and  entirely  contrary  to  the  best  interests 

of  the  State  or  its  people  under  our  form  of  government  for 

the  State  to  directly  enter  into  any  business  which  interferes 

with  or  in  any  way  curtails  legitimate  individual  enterprise, 

and   which   is   wholly   unnecessary   in   the   administration   of 


64  ADDRESS  OF  MR.  J.  SCOFIELD  ROWE 

proper  laws  for  the  government  of  a  free  and  liberty-loving 
people. 

In  other  words,  it  is  the  province  of  the  government  to 
govern  and  not  to  meddle  with  the  private  affairs  of  its  citi- 
zens, nor  to  enter  into  any  legitimate  field  of  private  enter- 
prise, whether  it  be  insurance  or  something  else. 

It  would  certainly  be  difficult  for  any  State  to  establish 
a  department  to  administer  so-called  workmen's  compensation 
with  its  stamp  of  paternalism  without  venturing  into  fields 
which,  it  is  doubtful,  if  this  republic  is  ready  to  enter,  and 
which  involve  a  complete  abandonment  of  individualism  for 
socialism. 

Why  not  suggest  that  the  State  form  a  fund  to  protect 
property  in  case  of  fire  or  to  protect  a  business  against  cal- 
amity involved  in  the  death  of  its  head,  or  entering  the  coal 
mines  to  bring  forth  the  fuel  to  warm  the  people,  or  engag- 
ing in  the  manufacturing  of  their  clothing  or  raising  crops  to 
feed  them? 

History  furnishes  proofs  in  abundance  of  the  deleterious 
effect  upon  a  people^s  virility  and  prosperity  inevitably  fol- 
lowing upon  paternal  government. 

But  entirely  aside  from  the  propriety  and  advisability  of 
the  State  entering  the  insurance  business,  can  it  transact  such 
business  as  well  as  the  private  companies  now  engaged  in  it 
which  have  made  deep  study  of  its  varied  and  intricate  prob- 
lems; which  have  built  up  thoroughly  equipped  and  skilled 
organizations  for  handling  it  in  its  many  complicated  phases, 
and  which  can  view  each  new  problem  in  the  light  of  long, 
wide,  and  varied  experience? 

The  chief  functions  of  an  insurance  business  dealing  with 
industrial  accidents  are  to  prevent  as  many  accidents  as  pos- 
sible and  to  give  fair  compensation  for  such  as  cannot  be 
prevented,  and  this  latter  properly  involves  the  resistance  of 
unjust  claims. 

Some  reformers  appear  to  have  overlooked  the  fact  that 
more  unjust  claims  are  sure  to  develop  under  a  compensation 
law  than  have  to  be  contended  with  under  present  conditions, 
as,  obviously,  every  injury,  however  slight,  will  be  made  the 
basis  of  a   claim  and   the  malingering  of  injured   workmen 


ADDRESS  OF  MR.  J.  SCOFIELD  ROWE  65 

who  will  endeavor  to  defer  the  cessation  of  indemnity  as  long 
as  possible  is  sure  to  prove  a  difficult  problem. 

It  is  a  recognized  fact  that  a  considerable  portion  of  the 
general  body  of  labor  is  normally  in  a  state  of  chronic  dis- 
satisfaction with  its  lot  as  regards  both  the  work  and  the 
pay.  This  is  especially  true  of  unskilled  labor,  whose  quantity 
and  quality  combine  to  procure  for  it  a  relatively  small  wage, 
and  whose  work  being  necessarily  physical  alone  is  more  apt 
to  involve  hard  labor. 

Wages,  like  everything  else,  are  governed  by  the  laws  of 
supply  and  demand,  but  this  does  not  always  appeal  to  the 
workmen  of  the  class  mentioned,  who  may  not  be  fitted  for 
any  higher  and  less  arduous  grade  of  work,  and  there  may  be 
many  others  eager  to  take  his  place  for  the  same  pay.  This 
thought  does  not  occur  to  him,  however,  and  it  is  perhaps 
natural  that  he  should  be  inclined  to  seize  upon  every  oppor- 
tunity to  make  a  claim  on  account  of  an  injury  and  to  enjoy 
indemnity  therefor  as  long  as  possible. 

In  this  country  it  has  been  the  experience  of  Liability  In- 
surance Companies  that  of  all  accidents  reported  to  them  only 
about  16  per  cent,  of  the  injured  had  a  just  claim  upon  the 
employer  through  his  negligence. 

If  a  large  proportion  of  unjust  claims  have  been  brought 
when  claimants  knew  they  must  prove  the  employer's  negli- 
gence to  get  damages,  is  it  not  certain  that  a  much  larger  per- 
centage will  develop  when  negligence  does  not  have  to  be 
proved;  when  it  is  necessary  merely  to  offer  sufficiently  con- 
vincing proof  of  receipt  of  injury. 

Whether  natural  or  not  this  has  been  the  experience  in 
countries  where  compensation  systems  of  insurance  are  in  ex- 
istence. 

Even  in  Germany,  where  the  first  thirteen  weeks  of  in- 
demnity for  accidents  is  paid  out  of  the  funds  of  the  sick 
associations,  which  are  run  by  the  workmen  themselves,  sim- 
ulation and  malingering  play  a  large  part  in  procuring  in- 
demnity and  in  prolonging  the  period  during  which  indemnity 
is  paid. 

If  workmen  will  attempt  thus  to  get  the  better  of  their 
fellow  workmen  it  is  certain  that  a  State  administration  of  in- 


(i^  ADDRESS  OF  MR.  J.  SCOFIELD  ROWE 

surance  funds  would  have  a  much  worse  experience  with  the 
same  evil. 

There  is  another  obstacle  in  the  way  of  the  creation  of 
such  State  organizations,  however,  which  is  likely  to  prove  in- 
superable— and  that  is  politics. 

The  one  great  menace  to  the  success  of  all  insurance 
against  industrial  -accidents  is  the  danger  of  enormous  sums 
being  disbursed  not  for  actual  loss,  but  for  successful  imposi- 
tion. To  avoid  this,  claims  must  always  be  investigated  in  an 
unbiased  manner.  Sometimes  in  a  way  that  may  seem  hard- 
hearted. 

Will  a  State  insurance  institution  investigate  in  this  way, 
and  can  it  resist  the  political  pressure  upon  it  to  be  lax? 

Will  the  investigators  put  aside  all  thought  of  political 
expediency  and  will  they  do  their  work  as  it  should  be  done, 
regardless  of  the  political  fate  of  their  chiefs  and  of  them- 
selves ? 

We  do  not  believe  it  possible  in  this  country  for  a  State 
insurance  administration  to  be  divorced  from  politics,  and  it 
is  hardly  necessary  to  refer  to  the  generally  well  known  fact 
that  the  State  cannot  conduct  any  business  as  economically  as 
private  enterprise. 

The  State's  disadvantage  in  handling  claims  for  political 
reasons,  as  well  as  lack  of  experience,  will  tend  towards  higher 
rates,  while  pressure  brought  to  bear  by  both  employer  and 
employee  will  work  towards  rates  insufficient  to  take  care  of 
a  constantly  increasing  volume  of  claim  payments,  each  year 
adding  its  modicum  to  those  brought  forward  from  previous 
years. 

If  rates  are  excessive  the  industries  of  the  State  will  be 
placed  at  a  disadvantage  in  competing  with  those  of  other 
States.  If  they  are  inadequate;  if  sufficient  reserves  are  not 
set  aside  each  year  to  care  for  future  payments  of  indemnity 
under  claims  already  established  the  burden  which  should 
properly  be  borne  by  present  employers  will  fall  too  heavily — 
perhaps  with  crushing  effect — upon  future  ones,  otherwise  the 
State  must  step  into  the  breach,  making  up  the  deficiency  and 
collecting  the  necessary  funds  through  the  medium  of  increased 
general  taxation. 


ADDRESS  OF  MR.  .T.  SCOFIELD  ROWE  67 

Suppose  such  a  State  insurance  law  provides  (as  I  be- 
lieve the  new  law  in  Ohio  does)  that  the  expense  of  the  com- 
plete administration  of  the  insurance  scheme  shall  be  paid 
out  of  the  general  funds  of  the  State,  will  the  general  tax- 
payers of  the  State  consent  to  pay  for  the  cost  of  such  an  or- 
ganization f 

In  our  humble  opinion  it  would  be  obviously  unfair  to 
require  the  people  of  a  State  through  increased  general  tax- 
ation to  pay  this  considerable  part  of  the  cost  of  private  indus- 
trial accidents  instead  of  its  being  distributed  as  a  part  of 
the  cost  of  the  product  among  the  entire  body  of  the  consum- 
ers of  the  product,  whether  in  Maine  or  Florida,  in  Europe 
or  Asia. 

Would  a  tax  for  such  a  purpose  be  any  more  fair  than 
one  imposed  to  carry  an  employer's  fire  insurance  policy  for 
him,  or  to  help  him  meet  the  increased  cost  of  raw  material? 

Deplorable  Conditions  in  Germany. 

Advocates  of  State  administration  of  proposed  workmen's 
compensation  insurance  back  up  their  arguments  by  reference 
to  the  semi- State  insurance  system  operating  in  Germany,  not- 
withstanding the  fact  that  the  difference  in  form  of  govern- 
ment and  political  conditions  makes  the  copying  of  the  Ger- 
man system  in  this  country  impossible. 

Admitting,  however,  for  the  sake  of  argument  that  the 
German  system  could  be  faithfully  operated  here,  how  many 
Americans  would  desire  to  see  the  resultant  conditions  repro- 
duced in  this  country? 

It  is  a  well  known  fact  that  in  Germany  the  result  of 
their  national  compensation  plan  has  been  to  tremenduously 
increase  the  number  of  accidents  reported  and  to  greatly  en- 
courage malingering,  if  not  to  have  actually  pauperized  the 
working  people. 

In  a  long  essay  on  the  subject  by  an  eminent  German 
writer.  Dr.  Ferdinand  Friedensburg,  who  has  been  associated 
with  the  Imperial  Insurance  Office  for  more  than  twenty  years, 
a  most  deplorable  condition  is  brought  to  light,  and  which 
clearly  indicates  that  German  industrial  life  is  wallowing  in 
the  mire  of  unrest  and  contentious  litigation;  and,  furthermore, 


68  ADDRESS  OF  MR.  J.  SCOFIELD  ROWE 

that  political  pandering  to  the  masses  has  resulted  in  an  en- 
larged and  almost  grotesque  bump  of  benevolence  which  com- 
pletely dominates  and  overshadows  all  sense  of  justice  and 
right. 

Dr.  Friedensburg  calls  attention  to  the  fact  that  one  of 
the  effects  that  was  expected  from  workmen's  insurance  was 
the  reconciliation  of  the  social  contrasts.  What  was  achieved 
in  this  respect  he  deplores  as  only  an  utter  failure. 

He  also  says  there  is  something  tragic  in  a  recent  report 
of  the  State  Secretary  of  the  Interior,  February  i8,  1910,  in 
which  the  Secretary  courageously  and  frankly  declares : 

"We  have  not  succeeded  in  bridging  the  deep  abyss 
torn  by  the  economic  struggle  of  the  last  decade." 

''Obviously  the  trouble  lies,  viewed  from  the  right 
angle,  with  the  mixing  of  insurance  with  politics.  Work- 
men's insurance  can  only  exert  its  effect  as  a  blessing,  if 
free  from  all  exaggeration,  and  particularly  from  the  con- 
scious or  unconscious  love-making  with  the  lower  classes, 
it  works  as  an  independent  institution,  free  from  all  par- 
tiality, as  all  others." 

English  Methods  Adaptable  to  This  Country. 

Other  advocates  of  State  administration  of  workmen's 
compensation  in  the  United  States  point  to  the  workmen's 
compensation  acts  of  Great  Britain,  and,  in  consideration  of 
the  fact  that  the  common  law  system  of  the  United  States 
was,  as  before  stated,  introduced  from  that  country,  the  com- 
parison is  for  this  and  other  reasons  more  apropos.  It  need  only 
be  said  that,  while  in  England  successive  compensation  laws 
have  been  passed,  making  it  compulsory  upon  employers  to  pay 
compensation  to  all  injured  employees,  no  steps  have  ever  been 
taken  by  the  British  Government  to  enforce  State  insurance, 
recognizing,  as  they  have  done,  that  the  liability  insurance  com- 
panies, with  their  experience  and  organization,  were  in  much 
better  position  than  could  be  any  government  commission  to 
administer  the  compensation  prescribed  by  the  English  acts. 

That  the  British  Government  has  been  wise  in  its  day 
and  generation,  in  leaving  the  administration  of  workmen's 
compensation     to     be    carried    out    by    the    Liability    Insur- 


ADDRESS  OF  MR.  J.  SCOFIELD  ROWE  69 

ance  Companies,  is  shown  very  clearly  by  the  following  clipped 
from  a  recent  issue  of  the  London  Daily  News: 

"The  employers  of  the  United  Kingdom  are  prob- 
ably imperfectly  aware  of  the  somewhat  remarkable  fact 
that  the  protection  obtained  by  them  over  a  long  series 
of  years  has,  taken  as  a  whole,  been  retained  at  rather 
less  than  cost  price. 

'That  a  number  of  large  public  companies  should 
transact  a  great  volume  of  business  year  after  year  at  a 
loss,  and  be  still  doing  so,  is  unique  in  the  annals  of  in- 
surance, and,  it  may  be  thought,  of  other  businesses  also. 

"Accident  insurance  was  not  unremunerative  until 
workmen's  compensation  business  came  into  vogue,  but 
the  difficulties  connected  with  it  have  been  so  great  as 
to  put  strong  offices  out  of  business,  and  to  bring  to 
naught  the  labor  of  many  years  in  upbuilding  an  exten- 
sive office  organization.  Estimates  of  the  rates  necessary 
for  risks  have  time  after  time  proved  to  be  insufficient. 
When  the  Act  of  1906  was  passed  it  was  believed  that 
in  the  case  of  miners  a  rate  of  i  per  cent,  on  the  wages 
would  suffice  as  a  premium  for  insuring  the  employer's 
liability.  It  has  been  shown  by  experience  that  five  times 
that  amount  is  necessary.  In  other  industries  from  ten 
to  twenty  times  the  original  rates  are  now  required,  and 
the  end  is  not  yet." 

This  should  be  sufficient  to  disabuse  the  mind  of  anyone 
imbued  with  the  idea  that  large  profits  are  easily  made  out  of 
employers'  liability  or  workmen's  compensation  insurance,  and 
it  would  be  well  for  the  State  to  leave  the  scientific  handling  of 
experimental  schemes  of  workmen's  compensation  in  the 
hands  of  the  liability  insurance  companies,  whose  experience 
gives  them  at  least  some  statistical  data  upon  which  to  base 
their  future  operations. 

In  conclusion,  we  repeat  that  there  can  be  no  justifica- 
tion for  interference  with  the  operations  of  insurance  com- 
panies or  the  acquirement  of  their  business  by  the  States, 
unless,  and  until,  the  people  of  this  country  are  ready  for  State 
socialism,  and  for  the  States  to  directly  take  up  the  trans- 
action of  any  and  all  classes  of  business. 

In  this  connection,  and  for  the  benefit  of  those  who  advo- 
cate the  copying  of  systems  in  foreign  countries  that  are  not 


yO  ADDRESS  OF  MR.  J.  SCOFIELD  ROWE 

adaptable   in  this   country,   we   cannot   do  better  than  quote 
from  a  recent  speech  of  President  Taft,  who  said: 

"I  have  seen  arguments  based  upon  the  attitude  of 
foreign  governments  toward  great  enterprises  in  which 
it  is  pointed  out  that  they  have  encouraged,  fondled  and 
protected  combinations  of  this  character.  That  is  true. 
There  is  a  tendency  among  some  foreign  governments  to 
encourage  what  they  call  trusts,  to  take  part  themselves 
in  the  management  of  the  trusts,  to  fix  prices  and  to 
depend  upon  governmental  control  to  secure  their  rea- 
sonable conduct;  but  such  a  system  with  us  is  absolutely 
impossible,  and  it  might  as  well  be  understood.  The 
countries  to  which  reference  is  made  are  veering  toward 
State  socialism.  This,  indeed,  if  competition  is  to  dis- 
appear, is  the  logical  escape  from  the  evil  of  private 
monopolies,  because  if  private  companies  are  not  to  be 
allowed  to  manage  everything  and  fix  prices  then  there 
is  every  reason  why  the  control  thus  exercised  by  them 
should  be  transferred  from  them  to  the  Government,  and 
this  is  State  socialism." 

Consideration  of  the  results  under  workmen's  compen- 
sation laws  of  the  British  companies,  as  shown,  might  per- 
haps give  pause  to  the  utterances  of  State  Governors  and  others 
who  have  not  been  content  with  criticising,  without  cause,  the 
increase  in  insurance  rates  that  the  liability  companies  have 
found  it  necessary  to  apply  in  States  where  compensation  laws 
have  been  enacted,  but  have  issued  threats  of  their  purpose  to 
advocate  State  insurance  if  the  liability  insurance  companies 
persist  in  charging  such  rates. 

It  need  only  be  said  that,  the  Liability  Insurance  Com- 
panies, with  much  more  knowledge  that  these  critics  of  what  is 
adequate  and  necessary  to  administer  workmen's  compensation 
benefits,  will  not  be  diverted  from  safe  and  sane  underwrit- 
ing methods  by  any  cheap  political  talk  on  the  part  of  those 
who  are  apparently  more  concerned  in  their  chase  for  notoriety 
than  they  are  in  establishing  a  reputation  for  truth  and  com- 
mon sense. 


ADDRESS  OF  MR.   EDSON  S.  LOTT  /I 


STATE  EMPLOYERS'  LIABILITY  INSURANCE 

(or  Workmen's  Compensation) 
Address  of  Mr.  Edson  S.  Lott 

PrcMdenl,  United  States  Casualty  Company,  New  York 

Governor  Woodrow  Wilson  has  the  reputation  of  being 
an  intelligent  student  of  the  progress  of  civilization  and  of  the 
laws  controlling  human  intercourse.  As  such,  his  opinions 
command  serious  consideration. 

A  labor  law  which  the  Governor  recommended  met  with 
opposition  from  some  employers  of  his  State,  the  opposition 
being  based,  in  part,  on  the  increased  cost  of  insurance  cover- 
ing employers  under  that  law.  The  Governor  meets  such  op- 
position by  saying  that  those  who  make  the  insurance  rates 
are  "singularly  unwise."  He  goes  further  and  makes  a  declara- 
tion which  sounds  almost  like  a  threat.  He  says  it  may  be 
necessary  for  New  Jersey  to  provide  a  system  of  State  insur- 
ance. 

When  the  Legislature  of  New  Jersey  adopted  and  Gov- 
ernor Wilson  approved  the  new  law,  it  may  be  assumed  he 
expected  that  under  it,  more  injured  workmen  would  receive 
compensation  from  their  employers  than  theretofore.  If  this 
is  not  so,  of  what  use  is  the  statute?  If  these  new  laws — 
Governor  Wilson's  laws  and  others  like  them — do  not  put  more 
cash  into  the  pockets  of  the  injured  workmen  and  their  de- 
pendents, then  they  do  not  accomplish  what  their  sponsors 
claim  for  them — then  the  laboring  men  have  been  fooled — 
fooled  by  their  friends.  If  they  do  put  more  money  into  the 
pockets  of  injured  workmen,  they  must  take  more  money  out 
of  the  pockets  of  the  employers.  The  employers,  quite  natur- 
ally, pass  the  increased  burden  on  to  the  liability  insurance 
companies. 

How  did  Governor  Wilson  presume  the  increased  cost 
would  be  met?  Did  he  expect  insurance  companies  to  main- 
tain the  old  rates,  without  regard  to  the  difference  in  loss  ratio  ? 
Of  course  he  did  not.   He  knew  that  an  increase  in  rates  was 


J 2  ADDRESS  OF  MR.  EDSON  S.  LOTT 

inevitable,  with  the  taking  effect  of  the  new  statute,  because 
of  the  increased  HabiHty  the  statute  imposed.  What,  then,  is 
the  basis  of  the  Governor's  declaration  that  the  increase  is  so 
great  as  to  be  evidence  of  a  lack  of  wisdom? 

Governor  Wilson  cannot  have  greater  knowledge  than 
insurance  underwriters  themselves  as  respects  what  it  is  likely 
to  cost  insurance  companies  to  insure  New  Jersey  employers 
against  their  liability  for  accidents  to  their  workmen.  He  has 
no  source  of  information  on  this  subject  which  is  not  readily 
accessible  to  every  underwriter  in  the  land.  He  surely  has  not 
studied — has  not  even  seen — the  figures  of  the  companies 
whose  managers  he  characterizes  as  "singularly  unwise."  It 
appears,  therefore,  that  in  this  particular  instance  Governor 
Wilson,  contrary  to  his  custom,  reached  a  conclusion  on 
eX'Parte  evidence. 

Quite  frequently  and  from  many  sources  we  hear  ex- 
pressions, concerning  liability  insurance,  which  may  well  be 
thrown  aside  as  unripe  thoughts  arising  from  a  superficial 
political  study  of  a  complex  commercial  question.  But  it  must 
be  admitted  that  there  is  a  difference  of  opinion  even  among 
experienced  liability  insurance  underwriters  concerning  what 
is  a  proper  premium  rate  for  employers'  liability  insurance  in 
those  States,  including  New  Jersey,  where  now  practically  all 
accidental  bodily  injuries  to  workmen  result  in  liability  on  the 
part  of  their  employers.  This  difference  of  opinion  is  shown  in 
the  varying  rates  on  the  same  risk  quoted  by  different  insur- 
ance companies. 

In  the  early  days  of  employers'  liability  insurance  in  this 
country,  claims  for  damages  by  workmen  against  employers 
were  made  far  less  frequently  than  at  present.  Formerly  the 
laws  of  the  various  States  did  not  hold  employers  to  so  strict 
accountability  as  they  do  at  the  present  time.  Premium  rates 
for  employers'  liability  insurance  in  many  States,  including 
New  Jersey,  have  been  radically  advanced  of  late  because 
employers'  liability  laws  have  been  radically  changed.  The 
lawmakers  of  many  States,  including  New  Jersey,  have  re- 
cently removed  many  of  the  legal  defenses  which  the  employer 
formerly  had.     A  far  greater  percentage  of  injured  workmen 


ADDRESS  OF  MR.   EDSON  S.  LOTT  73 

can  now  obtain  damages   (or  compensation)    from  their  em- 
ployers than  was  possible  under  the  old  laws. 

Insurance  companies  had  nothing  to  do  with  the  enact- 
ment of  these  laws.  Their  duty  consists  in  conforming  to  the 
laws  after  they  are  enacted. 

In  making  calculations  to  fit  these  new  conditions,  liability 
insurance  underwriters  have  used  the  data  at  their  command 
and  the  knowledge  founded  on  their  experience  in  an  endeavor 
to  name  premium  rates  which  will  prove  fair  to  the  insurer  and 
the  insured.  They  are  forced  to  realize  that  competition  will 
not  long,  if  at  all,  permit  them  to  charge  rates  which  are  too 
high,  and  that  rates  which  are  too  low  will  put  their  companies 
in  the  hands  of  receivers. 

The  laws  require  stock  liability  insurance  companies  to 
maintain  deposits  and  many  kinds  of  reserves.  Each  company 
is  required  to  maintain  a  statutory  deposit  in  its  own  State, 
for  the  protection  of  policyholders  everywhere,  which  deposit 
must  be  kept  intact  for  the  benefit  of  policyholders  should  the 
State  at  any  time  stop  the  company  from  doing  business.  This 
deposit  is  usually  a  quarter  of  a  million  dollars.  Such  com- 
panies also  must  always  have  on  hand  a  reserve  equal  to  their 
premiums  in  force,  so  that  should  the  State  appoint  a  receiver, 
he  may  reinsure  all  risks  without  loss  to  the  policyholders. 
In  addition,  companies  must  always  have  on  hand  a  reserve 
equal  to  all  their  indebtedness,  due  or  to  become  due.  More- 
over, in  addition  to  all  the  above,  companies  must  maintain 
reserves  for  claims  and  suits  based  on  each  notice  of  an  acci- 
dent received.  This  reserve,  called  the  claim  reserve,  is  a 
difficult  one  to  compute  properly,  for  the  reason  that  it  is 
extremely  uncertain  what  amount  a  company  may  finally  be 
called  upon  to  pay  in  consequence  of  each  accident  reported. 

At  first  each  company  "estimated"  the  probable  final 
amount  each  accident  would  cost,  and  set  aside  a  claim  reserve 
accordingly.  But  experience  showed  that  no  company  esti- 
mated enough.  It  was  found  that  the  final  cost  was  far  more 
than  the  amounts  estimated,  and  that  premium  rates  made  on 
such  estimates  were  too  low.  The  estimates  on  final  claim  costs 
were  increased  from  time  to  time  and  premium  rates  were 
advanced.     State  insurance  departments  also  began  to  realize 


74  ADDRESS  OF  MR.  EDSON  S.  LOTT 

that  company  estimates  of  claim  costs  were  too  low,  and  made 
rules  of  their  own  to  compel  companies  writing  liability  insur- 
ance to  set  aside  more  adequate  claim  reserves.  But  still,  as 
experience  matured,  it  was  found  that  the  actual  cost  of  settling 
claims  kept  ahead  of  the  reserves  provided. 

Then  various  States  enacted  laws  compelling  liability  in- 
surance companies  to  compute  reserves  for  claims  in  certain 
ways.  The  laws  differed  in  detail,  and  they  brought  about 
different  results,  but  all  of  them  were  enacted  with  one  object 
in  view — saving  the  companies  from  insolvency,  or,  more 
properly,  saving  insurers  from  patronizing  companies  which 
might  become  insolvent  and  leave  them  without  protection. 
The  companies  increased  their  reserves  and  their  rates,  and 
yet  neither  proved  high  enough.  Last  year  a  joint  committee 
of  State  insurance  officials  and  liability  insurance  underwriters 
prepared  a  draft  for  an  entirely  new  law  concerning  claim 
reserves,  and  the  States  of  New  York,  Connecticut,  Georgia, 
Massachusetts,  Ohio,  Minnesota  and  Washington  adopted  this 
law.  Now  it  will  be  necessary  for  companies  to  reserve  a 
greater  amount  than  ever  before  for  claims. 

It  is  common  knowledge  among  State  insurance  officials 
that  liability  insurance  premiums  must  be  advanced  if  the  com- 
panies writing  this  line  of  insurance  are  to  remain  solvent. 
When,  in  addition,  a  State  very  greatly  increases  the  liability 
of  employers  for  accidents  to  workmen,  then  the  insurance 
company  manager  who  does  not  very  greatly  increase  his 
premium  rates,  is  unworthy  of  his  position,  no  matter  how 
many  Governors  may  call  him  "singularly  unwise." 

And  the  case  is  not  altered  even  though  Justice  herself 
cries  aloud  for  these  laws. 

If,  under  the  old  and  less  drastic  laws.  State  insurance 
officials  found  that  many  companies  would  be  obliged  to  assess 
their  stockholders  for  more  money  to  maintain  a  sufficient 
reserve  for  claims,  because  their  premiums  were  insufficient, 
why  is  it  not  imperative  for  the  companies  greatly  to  advance 
their  rates  under  these  new  and  more  drastic  laws? 

The  losses  in  connection  with  liability  insurance  are  de- 
ceptive, for  they  mature  more  slowly  than  in  any  other  line  of 


ADDRESS  OF  MR.  EDSON  S.  LOTT  75 

insurance.  In  life  insurance  the  liability  of  the  insurance 
company  is  fixed  when  the  insured  dies.  The  liability  of  the 
fire  insurance  company  is  known  as  soon  as  the  fire  occurs  and 
the  value  of  the  property  burned  or  damaged  is  ascertained. 
In  glass  insurance  the  breakage  of  the  glass  immediately  es- 
tablishes the  loss  to  the  insurance  company.  It  is  far  different 
in  employers'  liability  insurance,  where  practically  all  losses 
are  (from  their  nature)  deferred  and  indefinite.  Sometimes 
the  loss  is  not  ascertainable  until  ten,  fifteen  or  twenty  years 
after  the  accident  occurs. 

Sometimes  a  workman  sustains  an  accidental  bodily  injury 
which  appears  to  be  trifling  and  without  inconvenience  he 
keeps  right  on  at  work  for  the  same  employer  for  years,  and 
then  is  discharged,  and  then  the  injury  becomes  serious  and 
then  (if  the  statute  of  limitations  will  permit)  a  suit  for  dam- 
ages is  brought  against  the  employer.  Sometimes  an  injury 
does  not  really  amount  to  anything  worth  while  until  the  right 
lawyer  gets  in  touch  with  the  injured  person,  and  then  it  has 
a  commercial  value — and  a  suit  for  damages  against  the  em- 
ployer follows.  A  minor  is  sometimes  injured  and  no  one  who 
is  authorized  to  bring  suit  considers  that  the  injury  lessens  in 
the  slightest  degree  the  earning  power  of  the  one  injured,  but 
when  the  minor  becomes  of  legal  age,  he  thinks  differently, 
and  sues  his  old  employer  for  damages.  Delayed  claims  and 
suits  of  workmen  for  damages  arising  from  bodily  injuries  are 
a  source  of  great  cost  to  every  liability  insurance  company. 
The  insurance  company  must  keep  "in  touch"  with  every  acci- 
dent reported  until  it  is  settled  or  outlawed. 

To  further  prove  the  need  of  experienced  and  intelligent 
underwriters  (State  or  otherwise)  in  fixing  in  advance  ade- 
quate premiums  for  employers'  liability  insurance,  the  follow- 
ing case  is  cited: 

Gerard  B.  Allen  &  Co.  were  proprietors  of  a  machine 
shop  in  St.  Louis.  In  1872  Patrick  Dowling,  a  boy,  was 
in  the  employ  of  the  firm.  One  day,  while  Dowling  was 
passing  from  one  part  to  another  of  the  machine  shop,  his 
trousers  became  caught  in  a  revolving  set-screw  and  his 
leg  was  drawn  into  the  shafting,  causing  injuries  which 
resulted  in  the  loss  of  his  leg. 


76  ADDRESS  OF  MR.  EDSON  S.  LOTT 

Three  years  later  (1875)  Dowling  brought  a  suit 
against  his  employers,  Allen  &  Co.,  for  damages.  At  the 
first  trial  the  court  non-suited  Dowling. 

Bowling's  lawyers  appealed  to  the  St.  Louis  Court  of 
Appeals,  where  the  case  was  ordered  to  be  tried  again 
(6  Mo.  App.,  195).  From  this  decision  Allen  &  Co.  ap- 
pealed to  the  Supreme  Court  of  Missouri,  but  the  decision 
of  the  St.  Louis  Court  of  Appeals  was  affirmed  and  the 
case  was  ordered  to  be  retried  in  the  Circuit  Court  of 
St.  Louis  (74  Mo.,  13). 

The  case  was,  therefore,  retried  in  1882,  ten  years 
having  passed  since  the  accident  happened. 

At  the  second  trial  Dowling  recovered  a  verdict  for 
$10,000,  from  which  an  appeal  was  taken  by  Allen  &  Co. 
to  the  Supreme  Court  of  Missouri,  which  ordered  another 
trial  (88  Mo.,  293). 

The  third  trial  took  place  in  1886.  At  this  trial  Dow- 
ling recovered  a  verdict  for  $i2r,ooo.  Again  Allen  &  Co. 
appealed.  The  legal  arguments  continued  until  1890, 
eighteen  years  after  the  accident.  This  time  Dowling  was 
successful  in  the  Appellate  Court,  and  the  judgment  for 
$12,000  and  costs,  which  were  very  heavy,  was  affirmed 
(102  Mo.,  213). 

The  final  decision  of  the  Court  was  promulgated  in 
1890,  nearly  nineteen  years  after  the  accident,  and  Allen 
&  Co.  were  obliged  to  pay  a  judgment  of  $12,000,  with 
interest  at  six  per  cent,  from  1886,  amounting  to  nearly 
$3,000,  together  with  all  costs  of  the  three  trials  in  the 
Circuit  Court  and  the  three  appeals  in  the  various  Appel- 
late Courts,  in  addition  to  the  fees  of  their  lawyers,  of 
whom  two  sets  had  been  employed. 

Dowling  was  thirty-six  years  old,  married  and  the 
father  of  three  children,  when  he  finally  received  "dam- 
ages" for  the  injury,  and  it  is  safe  to  say  that  Allen  & 
Co.  spent  fully  $5,000  for  court  costs,  printing  briefs, 
transcripts  of  the  testimony,  lawyers'  fees  and  other  legal 
expenses,  so  that  their  experience  with  Dowling  could  not 
have  cost  them  much,  if  anything,  less  than  $20,000. 

The  testimony  regarding  the  boy's  experience,  his 
knowledge  of  the  danger  of  getting  near  the  set-screw,  and 
the  foreman's  instructions  to  Dowling,  were  conflicting, 
and  the  witnesses  for  Allen  &  Co.,  including  the  fore- 
man and  many  others,  flatly  denied  the  boy's  story,  but 
the  jury  nevertheless  chose  to  believe  him,  and  the  result 
was  as  above  set  forth. 


ADDRESS  OF  MR.  EDSON  S.  LOTT  ^^ 

Similar  instances  are  not  infrequent.  It  requires  no  labor- 
ious search  through  the  reports  of  the  appellate  courts  to  find 
them. 

Allen  &  Co.  did  not  carry  liability  insurance,  but  the  illus- 
tration still  holds  good,  except  that  perhaps  an  insurance  com- 
pany would  have  terminated  the  litigation  earlier— or  settled 
with  Dowling  without  litigation.  When  an  employer  is  in 
direct  litigation  with  his  workman,  he  is  often  governed  by 
strong  prejudice  and  passion ;  that  is,  he  feels  keenly  a  personal 
injustice.  Insurance  companies  deal  with  such  things  imper- 
sonally, calmly  and  dispassionately. 

Such  cases  may  fairly  be  cited  as  showing  that  there  is 
need  for  changing  our  employers'  liability  laws  to  the  end  that 
swifter  justice  may  be  given  to  injured  workmen;  but  they 
also  clearly  demonstrate  the  need  of  much  experience  and  great 
technical  knowledge  in  fixing  in  advance  adequate  premium 
rates  for  employers'  liability  insurance,  and  the  difficulty  is 
certainly  not  decreased  by  the  enactment  of  workmen's  com- 
pensation laws.  If  Grovemor  Wilson  were  backing  any  insur- 
ance scheme  with  his  own  money,  it  is  altogether  probable  that 
he  would  call  in  some  expert  help  when  he  came  to  naming 
premiums  for  risks  which  might  continue  as  a  liability  for 
twenty  years — or  longer. 

Cases  such  as  this  also  prove  that  the  State  cannot  go 
into  the  business  of  liability  insurance  tentatively,  that  if  the 
State  once  takes  hold  of  that  business  it  will  be  practically 
impossible  to  let  go.  The  State  cannot  "try  it  on  to  see  how 
it  will  go."     If  it  puts  it  on,  it  cannot  easily  take  it  off. 

To  illustrate  still  further  the  deceptive  character  of  lia- 
bility insurance  to  the  inexperienced  or  uninformed,  and  as 
additional  evidence  that  insurance  losses  of  this  character  ma- 
ture slowly,  a  leaf  is  taken  from  the  experience  of  the  United 
States  Casualty  Company: 

During  1901  the  United  States  Casualty  Company 
insured  a  certain  number  of  policyholders  against  their 
liability  for  damages  arising  from  accidents.  The  policies 
ran  for  one  year.  The  total  premiums  represented  a  cer- 
tain amount.  The  company  paid  out  for  claims  under 
those  policies  during  that  same  year  (1901)  11.07  per  cent. 


yS  ADDRESS  OF  MR.  EDSON  S.  LOTT 

of  the  total  premiums  received.  That  is,  at  the  end  of  the 
year  the  company  had  on  hand  88.93  per  cent,  (less  ex- 
penses of  administration)  of  the  total  premiums  received. 

This,  considering  only  the  losses  paid  the  first  year,  would 
probably  have  looked  like  a  highly  profitable  business  to  Gov- 
ernor Wilson.    But  wait! 

During  the  next  year  (1902)  the  company  paid  out 
an  additional  25.97  P^^  ^^^*-  ^^  those  1901  premiums 
under  those  1901  policies,  for  claims  arising  from  acci- 
dents happening  while  those  same  policies  were  in  force. 
During  the  next  year  (1903)  the  company  paid  out  an  ad- 
ditional 12.67  P^^  cent,  of  those  1901  premiums  under  those 
1901  policies,  for  claims  arising  from  accidents  happen- 
ing while  those  same  policies  were  in  force.  During  1904, 
7.96  per  cent,  was  added  to  the  loss  ratio  in  the  same  way. 
During  1905,  2.56  per  cent,  was  added  to  the  loss  ratio 
in  the  same  way.  All  this  converted  a  loss  ratio  of  11.07 
per  cent,  at  the  end  of  the  first  year  (100  per  cent,  re- 
ceived in  premiums  and  11.07  per  cent,  paid  in  losses) 
into  a  60.23  per  cent,  loss  ratio  at  the  end  of  the  fifth  year 
(100  per  cent,  received  in  premiums  and  60.23  per  cent, 
paid  in  losses)  and  the  United  States  Casualty  Company 
is  still  paying  claims  under  those  1901  policies. 

There  is  nothing  unusual  about  the  above  illustration. 
One  of  the  smaller  casualty  insurance  companies  had  a  loss 
ratio  at  the  end  of  1899  of  11.32  per  cent,  on  its  1899  premiums 
for  liability  insurance;  its  loss  ratio  on  those  1899  premiums 
had  climbed  to  77.34  per  cent,  at  the  end  of  the  fifth  year,  and 
it  is  still  paying  losses  on  those  same  premiums.  Its  1900 
premiums  began  with  a  loss  ratio  of  13.50  per  cent,  the  first 
year,  reached  73.08  at  the  end  of  the  fifth  year,  and  not  all  the 
claims  against  those  1900  premiums  have  yet  been  settled. 

A  large  foreign  casualty  insurance  company  (doing  busi- 
ness in  this  country)  began  the  year  1901  with  a  loss  ratio 
of  7.38  per  cent,  on  that  year's  premiums,  had  paid  out  for 
losses  at  the  end  of  the  fifth  year  70.03  per  cent,  of  its  1901 
premium  income,  and  is  still  paying  losses  on  that  year's 
premiums. 

One  of  the  oldest  and  largest  American  casualty  insurance 
companies  paid  out  for  claims  during  1901,  on  account  of  the 


ADDRESS  OF  MR.  EDSON  S.  LOTT  79 

liability  policies  it  issued  that  year,  6.83  per  cent,  of  its  total 
premiums  for  those  policies.  It  kept  on  paying  claims  under 
those  same  policies  until  at  the  end  of  the  fifth  year  it  had  paid 
out  for  claims  61.02  per  cent,  and  it  is  still  paying  claims  aris- 
ing under  those  same  policies. 

Here  is  one  company's  record  at  the  end  of  such  five-year 
period  for  five  such  periods. 


1897 — 1902 

64.72% 

1898 — 1903 

55-77% 

1899 — 1904 

82.33% 

1900 — 1905 

50.51% 

I 90 I — 1906 

59.60% 

Of  course,  liability  insurance  companies  strive  to  their  ut- 
most to  settle  claims  as  soon  as  possible,  for  such  a  course  is 
not  only  the  most  satisfactory  to  the  insured  but  it  is  the  most 
economical  for  the  insurance  company.  However,  in  a  great 
many  cases,  claims  of  this  character  simply  cannot  be  settled 
as  soon  as  the  accidents  occur.  The  delays  are  inseparable 
from  the  character  of  the  claims.  Presumably  the  State  would 
lag  far  behind  private  enterprise  in  the  matter  of  disposing 
of  claims,  inasmuch  as  competition,  if  nothing  else,  has  caused 
each  insurance  company  so  to  perfect  its  claim  department 
(with  its  army  of  co-workers)  that  the  claim  service  rendered 
shall  be  in  the  very  highest  degree  satisfactory  to  its  assured. 
No  such  service  can  be  wholly  satisfactory  to  the  assured  un- 
less the  claimants  (injured  workmen)  are  dealt  with  in  a  broad 
and  liberal  manner  as  distinguished  from  a  narrow  and  tech- 
nical spirit. 

I  do  not  know  whether  Governor  Wilson  has  considered 
all  these  matters  or  not. 

Suppose  the  State  of  New  Jersey  does  go  into  the  busi- 
ness of  liability  insurance.  Who  will  run  the  State  company 
(or  department)  ?  Will  all  stock  companies  be  driven  out  and 
the  State  be  given  a  monopoly?  Or  will  the  State  merely  be- 
come a  competitor  of  the  stock  companies?  In  either  event, 
who  will  fix  the  premium  rates  to  be  charged  by  the  State, 
and  what  will  be  the  basis  of  calculation?  How  will  the  State 
department  or  bureau  determine  the  amount  to  be  paid  to  each 


8o  ADDRESS  OF  MR.  EDSON  S.  LOTT 

particular  injured  employee?  Who  will  have  the  last  say? 
Will  State  adjusters  have  power  to  "compromise"  claims,  or 
must  each  go  through  the  courts,  to  eliminate  frauds?  Is 
there  any  method  (whether  under  a  workmen's  compensation 
law  or  otherwise)  whereby  a  definite  sum  can  be  fixed  for 
every  conceivable  injury?  If  all  the  premiums  received  by  the 
State  are  not  sufficient  to  pay  all  the  losses,  who  will  pay  the 
difference  ?  The  taxpayers  at  large,  irrespective  of  whether  or 
not  any  particular  taxpayer  is  insured?  Would  this  be  just  to 
the  taxpayers?  If  all  the  premiums  received  by  the  State  are 
not  sufficient  to  pay  all  the  losses,  will  the  employers  who  are 
insured  be  assessed  from  time  to  time  for  more  premiums? 
If  so,  what  about  the  employer  who  pays  an  initial  premium 
and  then  goes  out  of  business,  becomes  insolvent  or  dies, — who 
makes  up  for  him? 

.  The  labor  bureaus  of  various  States  now  attempt  to  col- 
late and  classify  reports  of  accidents  to  workmen.  So  great  an 
authority  as  the  Hon.  Charles  P.  Neill,  Commissioner  of  Labor 
of  the  United  States,  says  that  it  is  a  crime  to  use  the  data 
thus  obtained  by  many  States — it  is  so  misleading.  Would  the 
reckoning  as  respects  the  prospective  cost  of  liability  insurance, 
when  promulgated  by  the  State,  be  likely  to  be  more  accurate 
than  the  figures  emanating  from  the  labor  bureau  of  the  State? 
What  advantage  has  the  State  over  a  private  corporation 
as  respects  management  expenses,  unless  it  be  in  the  saving  of 
agents'  commissions?  Conceding  that  the  State  can  do  away 
with  agents'  commissions,  will  it  not  cost  just  as  much  to  send 
competent  men  to  employers  to  arrange  for  the  insurance? 

There  are  numerous  classifications  for  employers*  lia- 
bility insurance,  each  taking  its  own  rate  according  to  its 
hazard.  There  are  many  kinds  of  policies,  according  to  the 
needs  of  the  insured.  The  agent  who  solicits  the  business 
must  understand  the  hazard  to  be  covered  and  the  needs  of 
the  insured,  that  he  may  have  issued  for  him  the  certain 
policy  or  policies  that  will  give  him  the  protection  for  which 
he  pays.  The  underwriter  at  the  home  office  of  the  insuring 
company  personally  inspects  each  application  of  the  insured 
and  each  policy  issued,  to  see  that  they  are  in  order.    For  com- 


ADDRESS  OF  MR.  EDSON  S.  LOTT  8l 

plicated  risks  much  correspondence  usually  ensues  before  the 
policy  is  in  correct  form. 

The  stock  company  underwriter  has  authority  to  adjust 
everything  to  fit  the  needs  of  each  insured.  How  would  the 
State  arrange  this? 

And  who  will  audit  for  the  State  the  payrolls  of  the  as- 
sured? And  who  will  settle  disputes  over  the  correctness  of 
the  audits? 

When  the  State  has  fixed  its  premium  rates,  how  will  it 
know  whether  they  are  adequate  until  all  the  claims  for  acci- 
dents happening  while  the  insurance  was  in  force  have  been 
settled  or  outlawed? 

And  will  the  actuaries,  underwriters,  claim  adjusters  and 
clerical  force  all  change  every  time  the  State  changes  its  poli- 
tics? Will  a  big  employer  of  labor,  with  a  big  political  follow- 
ing, be  permitted  to  name  one  of  the  underwriters,  and  will 
such  underwriter  feel  under  obligation  to  name  a  low  rate 
to  such  employer? 

Will  the  State  be  able  to  get  as  competent  managers  and 
employees  as  the  insurance  companies? 

Aside  from  agents'  commissions,  is  it  reasonable  to  sup- 
pose that  the  State  can  conduct  the  business  as  economically 
and  as  efficiently  as  insurance  companies?  And  will  salaried 
State  negotiators  cost  less  per  dollar  of  premium  than  company 
commission  agents? 

When  an  employer  insures  against  accidents  to  his  em- 
ployees, he  usually  also  insures  against  accidents  to  other 
persons — the  public.  The  owner  of  an  establishment  may  be 
liable  for  damages  to  any  person,  whether  an  employee  or  not, 
who  sustains  a  bodily  injury  on  or  about  his  premises.  The 
prudent  owner  takes  out  public  liability  insurance  as  well  as 
employers'  liability  insurance.  Both  hazards  are  often  covered 
in  one  policy.  The  two  hazards  are  closely  interwoven.  Will 
the  average  insured  split  his  insurance,  giving  one  piece  to  the 
State  and  the  other  piece  to  a  stock  company  ? 

It  is,  of  course,  very  doubtful  whether  Governor  Wilson 
will  finally  actually  advise  his  State  to  go  into  the  business  of 
insurance.  He  certainly  will  not  advise  his  State  to  insure 
steam-boiler,  elevator,  teams,  vessel,  theatre,  landlord,  auto- 


82  ADDRESS  OF  MR.  EDSON  S.  LOTT 

mobile  and  kindred  lines.  Such  insurance  protects  the  insured 
against  his  liability  for  accidents  to  his  employees  and  also 
against  his  liability  for  accidents  to  the  general  public.  It  is 
not  conceivable  that  the  State  will,  for  a  consideration,  hold 
one  citizen  harmless  from  his  liability  to  another  citizen,  when 
such  liability  arises  from  a  law  created  for  the  protection  of 
both  citizens. 

Many  contractors  carry  on  operations  in  two  or  more 
States.  Many  manufacturers  send  their  products  all  over  the 
country  and  send  their  own  men  along  to  install  them.  If 
-such  contractors  and  manufacturers  were  insured  by  the  State, 
of  what  value  would  the  insurance  be  when  the  insured  were 
operating  outside  of  the  State? 

If  the  State  company  were  given  a  monopoly  of  the  busi- 
ness in  its  State,  would  it  insure  the  concern  of  another  State 
while  carrying  on  operations  in  its  State? 

The  proper  kind  of  self-interest  will  be  entirely  absent 
from  officials  who  are  selected  to  manage  the  State  company, 
while  always  present  with  the  stock  company  officials.  Self- 
interest  is  a  tremendous  motive  to  keep  up  the  service  to  the 
insured  and  to  keep  down  the  expenses  of  management.  State 
company  officials  will  be  selected  by  politicians  and  will  them- 
selves be  politicians.  They  can  hardly  be  expected  not  to  em- 
brace the  opportunity  to  become  personally  popular  through 
liberal  expenditures.  They  will  have  no  personal  interest  in 
preventing  payments  to  excessive  and  fraudulent  claimants. 

Stock  company  officials  are  selected,  retained  and  promoted 
on  their  merits. 

Moreover,  I  make  the  bold  statement  that  no  State  can 
obtain  the  services  of  the  army  of  competent  men  required 
to  conduct  successfully  a  large  liability  insurance  company. 
Those  having  the  necessary  technical  and  practical  knowledge 
would  not  accept  a  State  position — they  would  leave  such 
insecure  positions  for  the  politicians  and  their  followers. 

Insurance  companies  are  already  supervised  to  such  an 
extent  that  they  may  almost  be  said  to  be  part  of  the  State, 
What  other  business  is  there  which  is  subjected  to  such  great 
publicity  as  is  that  of  insurance?  Every  dollar  of  income  is 
reported  to  the  public  authorities  of  nearly  half  a  hundred 


ADDRESS  OF  MR.  EDSON  S.  LOTT  83 

States,  if  the  company  is  doing  business  in  all  of  them.  These 
reports  are  spread  broadcast.  Expenses  are  subjected  to  the 
same  scrutiny.  Every  detail  of  management  is  supervised  by 
public  authorities.  Even  the  right  to  contract  is  limited  by  law 
and  supervised  by  insurance  commissioners. 

No  less  a  person  than  Arthur  I.  Vorys,  for  many  years 
State  Superintendent  of  Insurance  of  Ohio,  has  said : 

"There  is  no  institution  in  the  United  States  sub- 
jected to  as  much  inspection,  supervision,  regulation  and 
dictation  as  insurance." 

All  stock  liability  insurance  companies  are  now  inspected, 
supervised  and  regulated  by  the  State,  save  only  as  respects 
premium  rates,  and  competition  surely  regulates  the  rates,  for 
liability  insurance  in  this  country  is  no  longer  controlled  by  a 
few  companies.  Many  States  now  have  their  own  stock  lia- 
bility insurance  company,  some  States  have  many  such  com- 
panies. Indeed,  new  companies  are  springing  up  so  fast  that, 
at  the  present  rate  of  increase,  right  soon  every  considerable 
city  can  boast  of  being  the  headquarters  of  one  or  more  lia- 
bility insurance  companies.  New  Jersey  has  one,  and  another 
is  in  the  process  of  formation  there. 

If  Governor  Wilson  thinks  that  the  rates  liability  insur- 
ance companies  are  asking  in  his  State  are  so  high  that  the 
companies  will  make  too  large  profits,  he  need  not  set  the  cum- 
bersome State  machinery  in  motion  for  the  purpose  of  reliev- 
ing his  fellow  citizens  from  that  evil.  That  will  be  a  slow 
method,  at  best.  He  can  give  relief  more  quickly  by  asking 
his  monied  friends  to  start  a  company  of  their  own — ^they  can 
get  a  new  company  under  way  within  a  few  weeks. 

It  requires  neither  experience  nor  good  judgment  to  start 
a  liability  insurance  company.  All  legal  requirements  are  met 
by  raising  the  necessary  capital. 

But  the  Governor  had  better  look  before  he  leaps.  He 
glories  in  the  fact  that  he  has  been  a  teacher.  Long  ago,  the 
greatest  of  teachers  pointed  out  the  folly  of  an  intending 
builder  who  "sitteth  not  down  fixst  and  counteth  the  cost." 

Much  has  been  said  in  favor  of  the  part  "the  State"  plays 
in  Germany  as  respects  workmen's  compensation  for  accidents. 


84  ADDRESS  OF  MR.  EDSON  S.  LOTT 

The  German  system  is  often  pointed  to  as  a  model  for  this 
country. 

For  twenty  years  Dr.  Ferdinand  Friedensburg  was  Presi- 
dent of  the  Senate  of  the  Imperial  Insurance  Office  of  the 
German  Empire. 

Dr.  Friedensburg  has  issued  a  pamphlet  calling  attention 
to  the  abuses  of  German  State  employers'  liability  insurance 
as  it  has  worked  out  in  practice.  He  does  not  condemn  the 
underlying  principles  of  workmen's  compensation  for  acci- 
dents. 

Dr.  Friedensburg  says  that  charity  crept  in  and  corrupted 
the  system  at  the  beginning;  that  "workmen  very  soon  got 
accustomed  to  bringing  their  complaints,  doubts,  and  claims 
of  all  natures  whatsoever  to  the  Imperial  Insurance  Office, 
often  without  appealing  to  any  intermediate  instance;"  that 
the  Imperial  Insurance  Office,  which  is  intended  to  handle 
questions  of  law,  is  overburdened  with  frivolous  and  unfounded 
claims;  that  "the  expenses  of  the  system  continued  to  grow 
as  the  force  required  increased ;"  that  "the  number  of  officials 
in  the  Imperial  Insurance  Office  has  multiplied  in  tune  with 
the  ever- waxing  burden  of  work  ;*'  that  *****  the  num- 
ber of  accidents  grows  with  monstrous  speed;"  that  "in  1886, 
100,159  accidents  were  reported  and  10,540  (10  per  cent.)  com- 
pensated, in  1908  662,321  accidents  were  reported  and  142,- 
965  (21  per  cent.)  compensated;"  that  "often  an  accident  is 
sought  for  and  arranged;"  that  sometimes  a  chronically  sick 
man  swears  that  his  old  illness  is  the  result  of  a  recent  acci- 
dent and  gets  consequential  help;  that  "the  communal  chiefs 
act  entirely  under  the  belief  that  they  ought  to  help  their  local 
residents,  *  *  *  as  a  result  of  the  common  opinion  that 
the  insurance  funds  have  more  money  than  they  know  what 
to  do  with,  and  this  idea  strikingly  deadens  the  conception  of 
legality  and  love  for  the  truth;"  that  "naturally  the  universal 
laxity,  the  payment  of  unjustified  claims,  and  the  extrava- 
gance practiced  in  equipping  hospitals  and  sanatoria  impair 
the  integrity  of  the  insurance  funds;"  that  "employers  do  all 
that  is  possible  to  escape  their  burdens,  which  they  feel  to  be 
unjust,  and  in  vain  enormous  sums  are  annually  exacted  from 
them  in  fines;"   that  *****     industrial  unions  and  insur- 


ADDRESS  OF  MR.   EDSON  S.  LOTT  8$ 

ance  institutions    *    *    *    have  been  repeatedly  on  the  brink 

of  bankruptcy." 

Dr.  Friedensburg  points  out  that  the  excessive  cost  of 

the  insurance  system,  which  is  one  result  of  the  degradation 

of  the  system  into  charity,  is  complained  of  by  employers,  and 

that  State  insurance,  therefore,  reacts  injuriously  upon  Ger- 
many's industry. 

He  says :  "As  a  result  of  the  cost  of  insurance,  which  has 
gradually  become  monstrous,  *  *  *  German  industry  is 
put  at  a  disadvantage  and  is  hampered  to  the  extreme  in  its 
competition  with   foreigners." 

Indeed,  Dr.  Friedensburg  makes  the  astounding  statement 
that  the  German  system  of  workmen's  compensation  is  held 
responsible  for  the  marked  rise  in  prices  which  is  felt  to  be 
oppressive  by  all  classes  of  the  German  population. 

Liability  insurance  companies  in  this  country  now  have 
the  necessary  organizations  to  care  properly,  on  behalf  of  em- 
ployers and  others,  for  claims  for  damages  and  compensation 
arising  from  accidental  bodily  injuries. 

The  clumsy,  unwieldy,  red-tape,  extravagant  and  polit- 
ically-changing State  certainly  is  not  now  and  presumably  never 
will  be  properly  equipped  to  do  this  work  satisfactorily. 

The  greatest  danger  which  confronts  underwriters  in  this 
country  lurks  in  statements  such  as  Governor  Wilson's  for 
similar  statements  made  by  prominent  men  are  given  wide 
publicity  and  are  read  by  everyone.  On  the  other  hand,  few 
will  circulate  and  fewer  will  read  any  statement  made  by  any 
underwriter  in  defense  of  insurance  rates. 

I  respectfully  submit  to  Governor  Wilson  that  he  with- 
draw, at  least  for  the  time  being,  his  suggestion  of  State  in- 
surance, and  that  in  lieu  thereof  he  recommend  to  his  Leg- 
islature that  it  legalise  liability  insurance  rate-inaking  bodies 
under  State  supervision.  Then  all  such  companies  will  be 
under  the  complete  control  of  the  State,  and  the  State  will 
thereby  be  saved  from  a  possible  humiliating  failure  should 
it  plunge  into  the  business  directly. 

This  nation  of  ours  is  divided  into  half  a  hundred  sov- 
ereign States,  each  with  power  to  make  laws  to  govern  all  the 
liability  insurance  companies  now  doing  business  as  well  as 


86  ADDRESS  OF  MR.  EDSON  S.  LOTT 

those  companies  which  will  hereafter  enter  the  field.  This 
power,  properly  exercised,  ought  to  prove  more  effective  than 
State  insurance,  subject,  as  that  must  be,  to  political  influ- 
ence. Liability  insurance  is  a  science  the  practice  of  which 
does  not  easily  lend  itself  to  the  ordinary  abilities  of  the 
State  politician  and  the  party  boss,  who,  as  things  now  are, 
each  within  the  sphere  of  his  action,  dominates  State  govern- 
ment. 


ADDRESS  OF  MR.  JOHN  T.  STONE  8/ 


RATE  MAKING  UNDER  STATE  SUPERVISION 

Address  of  Mr.  John  T.  Stone 

President,  Maryland  Owualty  Company 

Throughout  the  legislation  proposed  and  enacted  relat- 
ing to  the  subject  of  recompense  for  industrial  bodily  in- 
juries, whether  such  legislation  take  the  form  of  modifi- 
cations in  the  system  known  as  employers'  liability  or  the 
form  of  the  establishment  of  the  system  known  as  work- 
men's compensation — and  throughout  the  nation-wide  dis- 
cussion of  this  many  featured  and  complex  subject,  that 
feature  which  is  most  complex,  most  difficult,  yet  primary 
and  fundamental,  namely,  the  feature  of  cost  has  had  scant 
attention  in  the  utterances  of  many  of  those  who  have  had 
great  influence  in  the  framing  of  legislation  on  the  sub- 
ject. That  is,  scant  attention  during  the  process  of  fram- 
ing and  enacting  such  legislation.  The  cry  of  the  be- 
reaved and  the  injured,  the  plea  of  the  sociologist  and 
humanitarian,  the  pressure  of  the  labor  organizations,  and 
other  influences,  all  legitimate  and  worthy  of  attention, 
have  so  filled  the  ears  and  monopolized  the  thought  of 
legislators  that  they  seem  not  to  have  heard  the  other 
voices  which  have  called  attention  to  the  fact  that  every 
increase  of  the  amounts  received  by  injured  employees 
means  a  corresponding  increase  in  the  amounts  paid  by 
employers.  It  seems  childish  to  state  so  elemental  a  fact, 
yet,  obvious  as  it  is,  our  law-makers  have  overlooked  it. 
Hence,  when  the  cost  of  meeting  this  increased  hazard 
thus  created  by  new  laws  is  reflected  in  advanced  rates 
for  employers'  liability  or  workmen's  compensation  insur- 
ance, a  great  outcry  of  amazement  and  protest  goes  up 
from  governors  and  others  against  the  insurance  com- 
panies. The  amazement  should  be  directed  against  their 
own  short-sightedness. 

But,  since  this  so  patent  a  fact  has  been  so  frequently 
overlooked,  some  other  equally  important  and  true,  but  per- 


88  ADDRESS  OF  MR.  JOHN  T.  STONE 

haps   not  very  generally  recognized,   facts  may  well  be  re- 
cited here. 

First. — Any  system  of  compensation  for  trade  injuries 
necessitates  insurance  in  order  that  the  unknown  but  prob- 
able annual  outlay  required  by  it  may  be  calculated  and 
limited  as  to  the  employer,  to  the  end  that  he  may  deal 
definitely  with  this  factor  of  cost  in  his  business. 

Second. — The  solvency  of  the  companies  issuing  such 
insurance  must  be  safeguarded  with  more  than  ordinary 
care,  because  the  losses  are  not  promptly  determinable,  but 
for  the  major  portion  unavoidably  require  considerable 
periods  of  time  in  adjustment. 

Third. — The  solvency  of  the  insurance  companies  de- 
pends upon  the  adequacy  of  their  income  to  meet  their 
outgo;  and  the  adequacy  of  their  income  depends  upon  the 
adequacy  of  their  premium  rates. 

All  this  is  plain  enough,  but  the  next  steps — the  ascer- 
tainment and  the  maintenance  of  adequate  rates — are  any- 
thing but  simple  propositions.  The  naming  of  insurance 
rates  is  altogether  different  from  the  quoting  of  prices  in 
any  other  class  of  business.  Insurance  deals  not  with  fac- 
tors like  raw  material  and  labor,  whose  cost  is  measured 
in  sums  already  paid  or  agreed  upon ;  but  with  the  unknown 
possibilities  of  future  occurrences.  How  then  can  any  pre- 
mium rate  be  named?  In  one  or  the  other  of  two  ways; 
either  by  guessing,  or  by  compiling  the  experience  of  the 
past  as  to  risks  the  same  as,  or  similar  to,  those  covered. 
Unfortunately  for  the  insurance  business,  there  have  been 
many  guessers  in  it,  who  have  literally  illustrated  the  say- 
ing sometimes  heard,  that  "insurance  is  a  gamble."  The  in- 
suring public,  upon  whom  the  loss  resulting  from  the  in- 
solvency of  companies  so  conducted  ultimately  falls,  is  en- 
titled to  be  safeguarded  against  that  kind  of  underwrit- 
ing. The  initial  safeguard  is  the  certainty,  or  as  near  to 
it  as  can  be,  that  the  premium  rates  are  sufficient. 

Now,  the  experience  of  no  one  company  is  sufficient 
for  the  calculation  of  dependable  rates.  Such  rates  must 
be  based  upon  a  broad  enough  exposure  to  support  a  de- 
pendable operation  of  the  law  of  average  as  to  every  one, 


ADDRESS  OF  MR.  JOHN  T.  STONE  89 

or  every  group,  of  the  many  hundreds  of  varieties  of  modern 
business.  The  only  method  of  ascertaining  what  rate  ought 
to  be  charged  for  each  of  these  numerous  classes  of  risks 
is  to  obtain  from  a  large  number  of  companies  their  tab- 
ulated and  classified  experience  for  a  number  of  years,  to 
have  that  mass  of  data  combined  and  analyzed  by  com- 
petent statisticians  and  actuaries,  and  to  have  the  results 
of  their  labors  reviewed  and  applied  to  the  present  condi- 
tions by  experienced  underwriters,  who  are  closely  follow- 
ing the  constant  changes  wrought  in  the  insurance  aspects 
of  trade  operations  by  the  passage  of  new  legislation.  Such 
a  method  of  rate  making  involves  constant  co-operation, 
unqualified  good  faith  and  much  labor  on  the  part  of  the 
companies  contributing  to  it. 

It  is  very  certain  that  there  must  be  something  more 
than  merely  ascertaining  what  the  rate  ought  to  be,  to  in- 
duce the  companies  to  take  part  in  a  plan  which  makes 
such  demands  upon  them.  There  must  be  not  only  the 
finding  of  the  right  rates,  but  some  reasonable  likelihood  of 
maintaining  them  when  found.  To  some  persons  the  mere 
mention  of  maintaining  rates  on  anything  immediately  con- 
jures up  the  monsters  of  restraint  of  trade,  monopoly, 
trusts,  etc. 

Passing  that  by  for  the  present,  let  us  review  briefly 
the  situation  as  it  has  been  for  the  past  ten  years,  during 
which  very  little  combined  effort  to  ascertain  rates  and  no 
concerted  efifort  to  maintain  them  has  been  made. 

As  to  the  companies :  Premium  rates  on  liability  insur- 
ance have  been  made  upon  a  purely  competitive  basis  for 
the  most  part.  Superficially  one  might  say  that  is  a  good 
thing  for  the  policyholder,  because  he  gets  a  lower  rate. 
Looking  deeper,  what  do  we  find?  These  results,  as  to  the 
companies :  rates  crowded  down  year  after  year,  frequently 
below  the  safety  line,  yet  the  companies  forced  to  meet 
them  in  order  to  prevent  being  forced  out  of  the  business; 
income  in  some  cases  insufficient  to  provide  sufficient  re- 
serves; the  surplus  of  some  companies  reduced,  the  capital 
of  some  endangered  and  stockholders  assessed. 


90  ADDRESS  OF  MR.  JOHN  T.  STONE 

In  the  eight-year  period,  from  1903  to  1910,  the  eighteen 
casualty  companies  which  wrote  employers'  liability  insur- 
ance made  an  average  underwriting  profit  of  2,28  per  cent, 
on  their  earned  premium  income  of  $279,000,000,  derived 
from  all  the  various  kinds  of  casualty  insurance.  As  some 
of  these  classes  are  known  to  be  much  more  profitable  than 
liability  insurance,  the  profit  on  that  branch  was  certainly 
less  than  the  very  narrow  margin  of  about  2j4  per  cent.; 
which  means  that  it  was  nearly,  or  quite,  nil.  Five  of  the 
eighteen  companies  made  a  net  loss  on  the  entire  eight 
years'  business. 

As  to  the  policyholders:  Always  an  uncertainty  as  to 
whether  the  rates  they  were  paying  were  not  more  than 
someone  else  paid  in  the  same  line  of  business ;  dissatisfac- 
tion and  widespread  criticism  because  of  alleged  delay  and 
trimming  of  claims;  doubt  and  fear  in  many  cases  lest  the 
insurance  company  may  not  survive  throughout  the  years 
and  may  be  unable  to  pay  its  claims  when  the  delayed  set- 
tlement day  arrives. 

These  are  the  facts  which  have  characterized  the  past 
decade  of  rate  competition  in  the  liability  insurance  busi- 
ness, and  they  have  brought  the  companies  to  a  keen  real- 
ization that  only  by  co-operation  in  ascertaining  and  main- 
taining rates  may  they  hope  to  survive  and  to  make  good 
their  obligations  to  their  policyholders.  But  when  they 
attempt  such  co-operation  they  are  advised  that  it  is  a  vio- 
lation of  the  anti-trust  laws  in  some  States  and  possibly 
an  infraction  of  the  common  law  doctrine  forbidding  com- 
binations "in  restraint  of  trade"  in  every  State.  If  such  be 
the  case,  it  is  high  time  for  the  enactment  of  laws  that  will 
effect  radical  changes  in  that  situation,  and  the  purpose  of 
this  paper  is  to  plead  for  such  enactments. 

Your  speaker  submits  this  proposition:  That  in  every 
State  a  law  should  be  enacted  which  will  provide  as  fol- 
lows: 1st,  that  the  Insurance  Commissioner  shall  obtain, 
within  a  specified  time,  from  any  rating  bureau  or  asso- 
ciation or  other  actuarial  or  statistical  sources  composed 
of  or  connected  with  companies  doing  this  class  of  business 
in  the  State,  a  manual  or  manuals  of  rates  and  regulations 


ADDRESS  OF  MR.  JOHN  T.  STONE  9 1 

for  the  writing  of  liability  or  workmen's  compensation  in- 
surance; 2nd,  that  a  State  Board  of  Insurance  Review  con- 
sisting of  the  Commissioner  and  two  other  members  to  be 
appointed  by  the  Governor  and  to  be  men  of  reputed  sound 
business  judgment  and  experience,  shall  pass  upon  the 
manuals  obtained  or  submitted  and  adopt  one  of  such ;  3rd, 
that  the  rates  contained  in  the  manual  so  adopted  shall  be 
the  minimum  rates  for  their  respective  classifications, 
always  subject  to  change  as  to  individual  classifications 
or  groups  upon  evidence  satisfactory  to  the  Board  of  In- 
surance Review;  4th,  that  after  the  adoption  and  pro- 
mulgation of  such  rates  by  the  Board  of  Insurance  Re- 
view every  company  writing  liability  or  workmen's  com- 
pensation insurance  in  that  State  shall  charge  not  less 
than  those  rates,  and  that  upon  proof  of  violation  of  this 
requirement  the  Insurance  Commissioner  shall  revoke  the 
license  of  the  company  so  offending. 

In  framing  this  proposal  I  have  endeavored  to  consider 
every  objection  that  might  be  raised  against  it,  and  I  find 
just  three.  First,  that  it  would  discourage  individual  under- 
writing judgment,  ability  and  initiative  by  placing  every 
company  on  the  same  level  as  to  price.  Second,  that  it 
would  encourage  the  exaction  of  excessive  rates.  Third, 
that  it  would  create  a  monopoly  for  the  benefit  of  the  com- 
panies which  already  have  the  business  on  their  books. 

As  to  the  first :  Instead  of  discouraging,  this  plan  would 
encourage  individual  underwriting  judgment,  ability  and  in- 
itiative by  delivering  agents  and  underwriters  from  the  un- 
wholesome atmosphere  of  that  competition  which  begins, 
continues  and  ends  in  the  effort  to  make  or  meet  the  lowest 
rate  and  leaves  little,  if  any,  room  for  the  more  important, 
indeed  the  vital,  factors  of  service.  In  fact,  it  is  the  ab- 
sence of  established  rates,  the  prevalence  of  the  notion  of 
competitive  cheapness,  the  concentration  of  the  attention 
of  underwriter,  agent  and  assured  upon  the  rate  alone, 
which  gives  but  little  encouragement  to  the  development 
of  initiative,  judgment  and  ability.  What  reward  is  there 
for  the  exercise  of  high  qualities  in  the  interest  of  better 
coverage,     intelligent     suggestion,     conscientious     service, 


92  ADDRESS  OF  MR.  JOHN  T.  STONE 

when  they  are  all  swept  aside  merely  by  a  reduction  in  rate 
offered  by  a  competitor?  On  the  contrary,  if  rates  were 
maintained  by  all  companies  alike,  every  faculty  of  judg- 
ment, ability  and  initiative  possessed  by  agent  and  under- 
writer would  be  enlisted  in  the  sane,  wholesome  and  im- 
proving competition  of  good  service  to  the  assured. 

Second,  as  to  encouraging  the  exaction  of  excessive 
rates:  The  plan  provides  that  the  rates  shall  be  calculated 
and  compiled  in  manual  form  by  the  action,  either  joint  or 
separate,  of  companies  doing  this  class  of  business  in  the 
State,  that  out  of  the  material  thus  furnished  the  Board  of 
Insurance  Review  shall  select  and  promulgate  its  official 
manual,  and  that  this  manual  or  any  rate  contained  in  it 
shall  be  subject  to  revision  upon  submission  to  the  Board, 
of  evidence  justifying  a  change.  There  is,  therefore,  this 
triple  defense  against  excessive  rates: — first,  the  common 
sense  of  the  companies,  who  know  that  their  patrons  will 
discontinue  the  insurance  rather  than  pay  excessive  rates; 
second,  the  determining  power  of  the  Board  of  Review  as 
to  what  the  rate  shall  be;  and  third,  the  opportunity  given 
at  all  times  to  any  one  interested  to  apply  for  and  secure 
a  hearing  and  a  revision  as  to  any  or  all  of  the  manual 
rates. 

As  to  the  third  objection  to  the  proposed  law  that  it 
would  create  a  monopoly  for  the  benefit  of  the  companies 
which  already  have  the  business  on  their  books — as  I 
recently  said  in  a  paper  discussing  anti-trust  legislation 
with  reference  to  insurance  companies: 

"The  easiest  thing  in  the  whole  range  of  corpora- 
tions to  start  and,  so  far  as  securing  patronage  is  con- 
cerned, to  run,  is  an  insurance  company.  In  every 
section  and  every  State  of  the  Union  and  in  every 
province  of  Canada  new  insurance  companies — fire,  life, 
casualty,  surety,  etc. — are  a  perennial  crop.  Why? 
Well,  there  are  various  reasons,  among  which  is  the 
ease  with  which  the  thing  can  be  done.  No  machinery 
to  construct,  no  patents  or  copyrights  to  purchase  or 
pay  royalties  on,  no  plant  or  buildings  to  erect,  no 
large  investment  necessary;  in  the  opinion,  appar- 
ently,  of  many  investors,   no   skilled   labor  or  super- 


ADDRESS  OF  MR.  JOHN  T.  STONE  93 

vision  required,  and  no  raw  material  at  all  to  be  ob- 
tained. It  is  an  unhappy  fact,  to  which  many  thou- 
sands of  stockholders  and  policyholders  in  the  hun- 
dreds of  defunct  insurance  companies  can  testify,  that 
the  ease  and  frequency  with  which  companies  have 
been  organized  is  proof  positive  that  a  monopoly  of 
the  business  is  an  absolute  impossibility  in  the  very 
nature  of  the  case. 

"The  fact  is,  and  it  is  as  obvious  a  fact  as  the  sun 
at  high  noon,  that  the  public  needs  protection,  not 
against  the  unreal  phantasy  of  insurance  monopolies, 
but  against  irresponsible  and  incapable  men  and  con- 
cerns who  sell  so-called  insurance  stock  to  unwise  in- 
vestors and  so-called  insurance  policies  to  unwise 
patrons." 

My  proposal,  therefore,  does  not  involve  any  danger 
of  that  impossibility,  a  monopoly  of  the  business. 

Permit  me  now  to  submit  the  reasons  which  support 
the  proposition  under  these  headings: 

(a)  The  direct  benefits  of  rating  bureaus  and  agree- 
ments among  the  companies. 

(b)  The  indirect  benefits,  or  by-products,  of  such 
agreements  and  bureaus. 

(c)  The  business  basis  for  State  supervision  of  the 
rates. 

(d)  ■  The  legal  basis  for  State  supervision  of  the  rates. 

The  Direct  Benefits  of  Rate  Agreements  Among  the 

Companies. 

These  have  already  been  alluded  to  in  this  paper,  so 
that  I  need  only  summarize  them  now.  Without  such 
agreements  the  great  labor  and  expense  of  maintaining 
actuarial  bureaus  for  the  tabulation  and  analysis  of  experi- 
ence data  and  the  deduction  therefrom  of  the  actual  cost 
of  carrying  each  class  of  risks,  upon  which  cost  the  rate 
must  be  predicated  if  it  is  to  be  fair  to  both  insurer  and 
insured,  would  hardly  be  justified.  With  such  agreements, 
giving  an  assurance  that  when  adequate  rates  are  ascer- 
tained they  will  be  maintained,  the  cost  of  the  actuarial 
bureau  becomes  a  legitimate  expense.     The  policyholder 


94  ADDRESS  OF  MR.  JOHN  T.  STONE 

benefits  constantly  by  such  bureaus  and  agreements,  be- 
cause he  knows  that  his  competitors  in  his  own  line  of 
business  pay  the  same  rate  for  the  same  class  of  hazard 
which  he  pays,  no  more,  no  less,  and  that  that  rate  is  not 
made  by  the  auctioneer  or  huckster  process,  but  by  intelli- 
gent calculation  on  the  basis  of  actual  experience.  The 
employer  and  employee  alike  benefit,  because  such  bureaus 
and  agreements  mean  that  the  solvency  of  the  companies 
will  be  conserved,  so  that  no  matter  how  long  a  time  may 
elapse  before  an  adjustment  of  a  disputed  claim  is  reached, 
and  no  matter  how  large  the  damages  assessed  may  be, 
the  insurance  company  will  be  able  to  pay.  If  such  bureaus 
and  agreements  had  always  been  maintained  there  would 
probably  have  been  no  bankruptcies  of  companies  and  con- 
sequent losses  to  policyholders  and  claimants. 

The  Indirect  Benefits,  or  By-products,  of  Such  Agreements 

and  Bureaus. 

They  offer  the  only  practicable  medium  through  which 
the  aggregate  experience  data  of  all  the  liability  insurance 
companies  may  be  made  available  and  useful  to  the  public 
and  public  officials  and  legislators  in  sounding  and  charting 
the  unknown  sea  of  workmen's  compensation  legislation. 
This  reason  may  not  commend  itself  to  some  of  the  dis- 
tinguished Governors  of  some  of  the  sovereign  States,  one 
of  whom  has  given  tongue  to  the  epithet  "fungoid  social 
parasites"  in  speaking  of  liability  insurance  companies.  The 
same  gentleman  fathered  a  law  creating  a  scheme  of  State 
Insurance  against  industrial  accidents,  and  in  advocating 
it  declared  that  no  insurance  man  should  have  anything  to 
do  with  framing  the  law  or  administering  it.  At  the  same 
session  of  the  Legislature  he  favored  a  bill  which  was 
enacted,  appropriating  a  very  large  sum  of  money  for  the 
erection  of  a  group  of  public  buildings  at  the  State  Cap- 
ital. To  be  consistent  he  should  have  stipulated  that  no 
architect  or  builder  should  have  anything  to  do  with  the 
planning  or  erection  of  those  buildings.  Happily,  however, 
our  public  life  is  not  afflicted  with  very  many  men  whose 
mental  vision  is  so  distorted,  and  we  may  therefore  urge. 


ADDRESS  OF  MR.  JOHN  T.  STONE  95 

with  confidence  in  its  general  acceptance,  the  public  value 
of  the  statistical  and  actuarial  compilations  of  experience 
data  by  rating  bureaus  of  liability  insurance  companies. 

Of  equal,  or  in  fact  greater,  value  to  the  public,  is  the 
preventive  work  which  such  bureaus  and  agreements  foster, 
and  which  without  them  would  be  limited,  spasmodic  and 
ineffective.  Only  a  very  few  of  the  larger  companies  have 
the  equipment,  and  a  volume  of  business  sufficient  to  justify 
the  expense,  necessary  for  the  inspection  of  risks  with  a 
view  to  reducing  the  number  and  the  severity  of  acci- 
dents. 

The  Workmen's  Compensation  Service  and  Informa- 
tion Bureau,  which  comprises  in  its  membership  almost 
all  the  companies  writing  such  insurance,  now  has  in  prep- 
aration a  plan  which  will  put  at  the  service  of  all  its  mem- 
bers, and,  therefore,  of  all  their  policyholders,  a  system  of 
inspections  of  risks  which  will  bring  to  bear  upon  them 
the  united  influence  and  the  combined  study  of  thoroughly 
trained  and  experienced  men  to  the  end  that  the  use  and 
the  improvement  of  existing  safety  devices,  appliances  and 
regulations  shall  be  encouraged  and  extended;  and  that 
where  such  safeguards  do  not  now  seem  practicable, 
although  needed,  conditions  shall  be  persistently  studied 
and  remedied  if  possible.  Comprehensive,  nation-wide  work 
of  this  kind  should  and  doubtless  will,  in  time,  accomplish 
very  great  saving  of  life  and  very  much  greater  preven- 
tion of  injuries,  which  will  in  turn  reduce  the  amounts 
paid  for  account  of  such  occurrences  and,  in  consequence, 
the  cost  of  insurance.  This  is  an  economic  by-product  (to 
say  nothing  of  its  humanitarian  value)  which  cannot  be 
extensively  produced  without  the  concerted  support  of  such 
a  bureau. 

The  Business  Basis  for  State  Supervision  of  Rates. 

If  a  rating  bureau  or  association  could  give  satisfactory 
assurances  that  its  rates  would  be  just  right  and  always 
right,  neither  too  high  nor  too  low  and  if  it  had  power  to 
compel  all  companies  writing  liability  or  workmen's  com- 
pensation insurance  to  contribute  to  and  participate  in  its 


96  ADDRESS  OF  MR.  JOHN  T.  STONE 

work  and  to  maintain  its  rates,  then  the  State  would  not 
need  to  supervise  it.  The  insuring  public  rightfully  de- 
mands that  the  rates  shall  not  be  excessive.  The  neces- 
sity for  constant  and  ultimate  certainty  that  the  protection 
paid  for  shall  fully  protect  demands  that  the  rates  shall  not 
be  inadequate.  Without  State  supervision  there  would  be 
always  the  possibility  on  the  one  hand  of  excessive  rates 
when  all  companies  were  in  the  bureau,  and  on  the  other 
hand  of  inadequate  rates  forced  by  the  cutting  of  com- 
panies outside  of  the  bureau.  With  State  supervision 
authorized  to  approve  or  amend  rates  and  to  require  all 
companies  to  charge  rates  thus  promulgated,  both  of  these 
dangers  become  impossible.  The  practical  wisdom  and  de- 
sirability of  rate  agreements  under  State  supervision  has 
had  recognition  and  advocacy  in  a  most  deliberate  and 
authoritative  fashion  in  the  three  representative  States  of 
New  York,  Illinois  and  Minnesota. 

In  April,  1909,  the  Illinois  Legislature  adopted  a  reso- 
lution authorizing  and  requesting  the  Governor  of  that 
State  "to  appoint  a  commission  consisting  of  five  competent 
and  disinterested  citizens,"  "to  report  as  to  the  advis- 
ability of  enacting  a  law  regulating  fire  insurance  rates  in 
this  State."  That  commission  submitted  its  report,  com- 
prising "jy  pages,  on  January  4,  191 1,  having  spent  nearly 
two  years  in  an  exhaustive  study  of  "the  most  important 
features  of  the  relation  of  the  fire  insurance  business  to  the 
insuring  public."  On  pages  74  and  75,  in  stating  its  con- 
clusions, the  commission  said,  "We  have  assumed  that 
regulation  did  not  presuppose  making  rates  by  the  State, 
and  our  investigation  leads  us  to  the  conclusion  that  any 
attempt  by  the  State  to  assume  the  function  of  creating 
or  originating  rates  for  fire  insurance  would  be  a  serious 
mistake,  both  from  the  standpoint  of  practicability  and 
of  the  constitutionality  of  a  law  for  this  purpose.  We  be- 
lieve the  State  should  not  make  rates  but  certainly  should 
supervise  the  rates  after  they  are  made."  "The  complaints 
which  have  been  made  to  us  have  been  chiefly  against  dis- 
crimination, and  such  complaints  have  been  well  founded 
and  the  evil  complained  of  should  be  corrected.     Let  the 


ADDRESS  OF  MR.  JOHN  T.  STONE  97 

insurance  companies  establish  rates  upon  all  classes  o-f  risks 
by  schedules  producing  uniformity  and,  after  such  rates 
are  fixed,  collect  them  from  all  persons,  upon  all  property 
in  all  parts  of  the  State." 

In  May,  1910,  the  Legislature  of  New  York  appointed 
a  committee  from  among  its  own  members  to  investigate 
insurance  coKipanies  "other  than  life,"  under  a  resolution 
so  phrased  as  to  require  the  most  searching  probing  into 
every  phase  of  the  subject.  The  committee  reported  on 
February  i,  191 1.  Its  report  makes  a  pamphlet  of  164 
pages,  and  states  that  for  lack  of  time  its  work  was  con- 
fined to  fire  insurance  including  insurance  exchanges  and 
boards  of  underwriters.  Forty  pages  of  this  report,  from 
page  38  to  page  78,  are  devoted  to  the  subject  of  rate  mak- 
ing. It  did  not  come  to  the  attention  of  your  speaker  until 
the  most  of  this  paper  had  been  written,  and  he  was,  there- 
fore, especially  gratified  to  notice  that  the  main  lines  of 
his  own  argument  herein  correspond  with,  and  are  very 
fully  elaborated  in,  the  contents  of  those  forty  pages.  Some 
of  the  conclusions  stated  by  the  committee  are  as  follows: 
"That  the  making  of  equitable  rates  demands  co-operation  ;*' 
"that  open  competition  leads  to  th^  general  weakening  of 
companies,  the  elimination  of  small  companies,  and  to  dis- 
crimination in  favor  of  the  policyholder  with  influence;" 
"that  the  only  alternative  to  open  competition  is  com- 
bination not  merely  to  make  but  to  maintain  rates;"  "that 
the  making  of  equitable  rates  is  the  consideration  which 
should  be  demanded  of  the  companies  for  the  right  to 
combine;"  and  that  the  committee  does  not  recommend 
rate  making  by  the  State,  but  the  supervision  of  rate  mak- 
ing bodies. 

In  the  recently  published  annual  report  of  Insurance 
Commissioner  Preus  of  Minnesota,  he  says: 

"Co-operation  in  the  making  of  rates  is  absolutely 
necessary.  First,  because  a  wide  experience  is  neces- 
sary in  order  to  arrive  at  equitable  rates;  secondly, 
economy  would  require  co-operation  in  arriving  at 
rates  because  the  same  rates  are  required  by  all  in- 
surance companies  and  duplication  of  the  work  would 


98  ADDRESS  OF  MR.  JOHN  T.   STONE 

be  extravagant.  The  time  has  now  gone  by  when 
any  commonwealth  is  desirous  of  competition  in  rates. 
The  experience  has  always  and  invariably  been  that 
where  there  is  competition  in  rates  men  with  influ- 
ence get  the  lowest  rates  and  such  competition  has 
usually  resulted  in  the  elimination  of  the  smaller  com- 
panies, and  has  weakened  the  confidence  of  the  public 
in  the  stability  of  fire  insurance  companies  in  general. 
There  can  be  no  question  but  that  open  competition 
in  rates  invariably  operates  to  the  detriment  of  the  poor 
man  and  in  favor  of  the  person  of  large  property  hold- 
ings. 

"Rate  making  bureaus  are  frequently  referred  to 
as  trusts  or  combinations  in  restraint  of  trade  and  in 
certain  instances  where  they  are  not  subject  to  State 
supervision  they  have  been  rightly  designated  as  mo- 
nopolies restraining  trade.  All  rate  making  bureaus 
operating  in  the  State  of  Minnesota  should  be  sub- 
ject to  supervision  by  the  State  Insurance  Depart- 
ment. No  company  or  agent  subscribing  to  the  rates 
of  a  bureau  should  be  permitted  to  cut  the  rates 
so  prescribed  or  in  any  manner  discriminate  between 
the  insured.  An  agent  or  company  violating  the  law 
against  rebating  should  be  penalized  by  having  their 
license  revoked  by  the  Commissioner  of  Insurance. 
The  Commissioner  of  Insurance  should  be  empow- 
ered upon  complaint  of  an  assured  or  insurer,  after 
investigation  by  the  proper  authority,  to  correct  the 
rates  of  a  rating  bureau.  There  is  no  reason  at  this 
time  why  the  State  should  have  the  burden  imposed 
upon  it  of  making  rates,  but  certainly  it  should  have 
supervisory  power  over  all  rating  institutions." 

While  all  three  of  these  official  utterances  relate  specif- 
ically to  fire  insurance,  they  have  even  greater  force  and 
closer  application  with  reference  to  liability  and  workmen's 
compensation  insurance. 

The  Legal  Basis  for  State  Supervision  of  the  Rates. 

In  Andrus  v.  Fidelity  Mutual  Life  Asso.,  67  S.  W.  585, 
the  following  language  was  used  by  the  Court : 

"By  reason  of  the  nature  of  the  business  insurance 
companies'  conduct,  by  reason  of  the  character  of  their 
contracts,  which  may  last  for  the  life  of  the  assured, 


ADDRESS  OF  MR.  JOHN  T.  STONE  99 

or  may  terminate  any  year  or  any  quarter,  *  *  * 
such  companies  and  such  contracts  naturally  and  prop- 
erly belong  to  a  class  unto  themselves  and  must  be 
governed  by  laws  that  would  be  wholly  inappropriate 
to  any  other  company  or  any  other  contracts." 

Here  the  doctrine  laid  down  gives  definite  judicial 
affirmation  to  one  of  the  fundamental  contentions  of  this 
paper,  namely,  that  the  insurance  business  differs  essen- 
tially from  other  kinds  of  business  and  must,  therefore,  be 
governed  by  different  laws. 

In  Whitfield  v.  Aetna  Insurance  Co.,  205  U.  S.  489,  it 
was  held  that  "It  is  competent  for  a  State  to  provide  regu- 
lations governing  contracts  of  insurance  and  declaring  the 
form  of  policies  and  the  effect  of  provisions  contained 
therein,  any  agreement  or  stipulation  between  the  parties 
to  the  contrary  notwithstanding.  For  instance,  the  State 
may  legally  declare  that  suicide  shall  be  no  defense  in  an 
action  on  a  policy." 

In  Hancock  Mutual  Life  Insurance  Co.  v.  Warren,  181 
U.  S.  'J2i,  it  was  held  that  "A  State  may  further  provide  that 
applications  shall  not  be  considered  a  part  of  the  contract 
unless  attached  thereto,  or  endorsed  thereon,  despite  the 
provisions  of  the  contract." 

In  New  York  Life  Insurance  Co.  v.  Cravens,  178  U.  S. 
389,  and  in  Continental  Fire  Insurance  Co.  v.  Whitaker 
(Tenn.),  64  L.  R.  A.  451,  it  was  held  that  "A  State  may  also 
declare  that  certain  statements  shall  not  be  construed  as 
warranties  or  void  the  policy  unless  material  to  the  loss." 

If  a  State  may  lawfully  change  and  modify  the  con- 
tract between  the  insurance  company  and  the  assured  in 
respect  to  its  coverage,  may  it  not  also  supervise  the  rates 
of  insurance?  There  seems  to  be  little  difference  in  effect 
between  decreasing  the  rate  and  increasing  the  hazard, 
or  vice  versa. 

Whether  a  State  may  constitutionally  regulate  the 
rates  of  its  own  insurance  companies  depends  upon  the  gen- 
eral character  of  the  insurance  business,  t.  e,,  whether  or 
not  it  is  charged  "with  a  public  interest."     In  the  case  of 


100  ADDRESS  OF   MR.  JOHN  T.  STONE 

McCarter  v.  Firemen's  Insurance  Co.,  73  Atl.,  p.  80,  this 
subject  is  considered  at  length,  and  the  Court  holds: 

"If  such  business  were  still  in  the  hands  of  in- 
dividual underwriters,  unaffected  by  State  regulation 
and  confined  to  the  writing  of  policies  on  the  dwell- 
ings of  prudent  householders  and  on  the  stores  of 
careful  merchants,  a  great  deal  might  be  said  in  favor 
of  the  view  that  no  public  interest  had  attached  to  the 
making  of  these  private  contracts.  We  cannot,  how- 
ever, close  our  eyes  to  the  fact  that  by  the  enormous 
extension  of  this  business,  by  its  concentration  in  the 
hands  of  immense  corporations,  by  State  regulations 
that  amount  to  privileges,  and  by  its  practically  uni- 
versal employment  as  collateral  security  for  debts, 
the  busin'ess  has  become  one  in  which  the  interest  of 
the  public  is  directly  involved." 

In  the  case  of  Northwestern  Mutual  Life  Insurance 
Co.  V.  Riggs,  27  Supreme  Court  Reporter,  120,  Justice  Har- 
lan says: 

"The  business  of  life  insurance  is  of  such  a  pecu- 
liar character,  affects  so  many  people,  and  is  so  in- 
timately connected  with  the  common  good,  that  the 
State  creating  the  insurance  corporations  and  giving 
them  authority  to  engage  in  that  business  may,  with- 
out transcending  the  limits  of  legislative  power,  regu- 
late their  affairs." 

Under  this  principle  of  public  interest,  laws  regulating 
the  rates  to  be  charged  by  various  corporations  have  been 
held  constitutional.     For  instance,  railroads: 

Chicago  &c.  Railway  Co.  v.  Minnesota,  134  U. 

S.  411. 
Chicago  V.  Wellman,  143  U.  S.  339. 

Rates  of  toll  charged  by  mills  which  grind,  or  offer  to 
grind,  grain  for  toll  or  pay. 

Burlington  v.  Beasley,  94  U.  S.  31©. 

Water  Companies. 

Spring  Valley  Water  Wks.  v.  Schlotter,  no  U. 

s.  347. 


ADDRESS  OF   MR.   JOHN  T.  STONE  Id 

Stock  Yards. 

Cotting  V.  Kansas  City   Stock  Yards   Co.,  183  U. 
S.  79. 

Grain  Elevators. 

Budd  V.  New  York,  143  U.  S.  517. 

A  State  may  regulate  the  rates  to  be  charged  by 
slaughter-houses. 

Slaughter-house  cases,  16  Wallace  (83  U.  S.)  36. 

A  State  may  regulate  the  rates  to  be  charged  by  gas 
companies. 

Spring  Valley  v.  Schlotter,  no  U.  S.  347. 

A  State  may  regulate  the  rates  of  interest. 

Kehler  v.  Miller,  i  Leg.  Chron.  35. 
State  V.  Harrison,  Harp.  88  (S.  C). 

It  may  be  said  in  the  light  of  all  this  that  a  State  can 
undoubtedly,  as  a  police  measure,  regulate  the  rates  to  be 
charged  by  foreign  insurance  companies,  provided  the  regu- 
lation is  based  upon  the  State's  license  to  do  business; 
and  that,  a  State  may  also  regulate  the  rates  to  be  charged 
by  domestic  insurance  companies  upon  the  ground  that 
insurance  is  charged  with  a  public  interest,  and,  therefore, 
can  be  controlled  by  the  State  to  the  extent  of  prevent- 
ing either  exorbitant  rates  or  unreasonably  low  rates  which 
would  tend  to  impair  the  solvency  of  the  company. 

This  power  of  State  regulation  or  supervision  of  rates 
has  already  been  exercised  by  several  States  with  refer- 
ence to  other  classes  of  insurance. 

The  Laws  of  Kansas,  Chapter  55,  Article  9,  provide  as 
follows : 

Section  4265  requires  fire  insurance  companies  to  file 
with  the  Superintendent  of  Insurance  general  basis 
schedules. 

Section  4267  allows  the  Superintendent  to  compel  the 
filing  of  af  higher  or  lower  rate  should  the  existing  rate  be 


102  ADDRESS  OF  MR.  JOHN  T.  STONE 


excessive  "or  inadequate  to  the  safety  or  soundness  of  the 
company." 

Section  4268  prohibits  fire  insurance  companies  from 
doing  business  in  the  State  unless  schedules  are  filed,  and 
from  writing  insurance  at  a  different  rate. 

Louisiana  Acts  of  1910,  No.  219,  creates  a  board  known 
as  a  State  Insurance  Rating  Board.  The  companies  are 
required  to  file  with  the  secretary  of  the  Board  general 
basis  schedules  showing  the  rates  of  premiums  on  all 
classes  of  risks  insurable  by  the  company,  and  all  charges, 
credits,  terms,  privileges  and  conditions  affecting  such 
rates,  together  with  rate  of  commission  to  be  paid  agents 
or  brokers.  The  companies  may  employ  expert  rate  makers 
to  compile  such  schedules.  The  Act  prohibits  discrimina- 
tion and  rebating. 

A  Missouri  law  of  191 1  requires  insurance  against  loss 
or  damage  by  fire,  lightning,  hail,  wind  storm  and  sprinkler 
leakage  to  be  conducted  according  to  the  provisions  of  the 
Act,  and  the  acceptance  of  a  certificate  to  transact  business 
in  the  State  is  deemed  a  consent  to  its  terms;  requires  all 
premiums  to  be  reasonable  and  just,  and  prohibits  dis- 
crimination; requires  all  such  insurance  companies  to  file 
with  the  Superintendent  general  basis  schedules  showing 
charges,  etc.,  affecting  the  rates  of  insurance  on  property 
in  the  State;  prohibits  the  collection  of  any  premium  other 
than  at  the  rate  shown  by  the  schedules  filed;  discrimina- 
tion and  rebates  are  prohibited;  fixes  a  penalty  of  fine  and 
imprisonment  for  violation  of  the  Act,  and  permits  the  rev- 
ocation of  the  company's  license. 

Insurance  Laws  of  South  Carolina,  Section  8,  page  13, 
prohibits  associations  to  fix  or  maintain  excessive  or  unrea- 
sonable rates,  but  provides  "that  it  shall  be  lawful  for  such 
insurance  companies  to  be  a  member  of  any  association  the 
purpose  and  object  of  which  is  to  secure  the  proper  in- 
spection of  risks,  the  classification  of  risks,  the  maintenance 
of  uniform  and  reasonable  rates,  and  the  prevention  of  dis- 
crimination in  charges  between  parties  dealing  with  such 
insurance  companies  in  this  State."  • 


ADDRESS  OF  MR.  JOHN  T.  STONE  IO3 

An  Act  of  the  Texas  Legislature,  approved  April  19, 
1909,  provides  as  follows: 

Sections  i  and  2  make  acceptance  of  the  conditions  of 
the  Act  a  prerequisite  to  the  granting  of  a  license  to  a  for- 
eign insurance  company,  and  of  a  certificate  to  a  domestic 
company. 

Section  4  requires  fire  companies  to  file  general  basis 
schedules  showing  the  rates  on  all  classes  of  risks  insured 
by  the  company,  with  charges,  credits,  terms,  privileges  and 
conditions  affecting  such  rates.  These  rates  may  be  pre- 
pared by  experts. 

Section  5  prohibits  changes  in  the  schedules  except 
after  thirty  days'  notice  and  the  filing  of  new  schedules. 

Section  6  allows  the  Board  to  determine  whether  the 
rates  are  excessive  or  inadequate,  and  to  compel  the  com- 
panies to  file  higher  or  lower  rates. 

Section  7  prohibits  fire  insurance  companies  from  writ- 
ing business  until  their  schedule  of  rates  has  been  filed, 
and  prohibits  any  departure  from  the  rates  filed. 

Section  10  prohibits  rebates  and  discriminations. 

Section  11  allows  the  revocation  of  the  license  for  vio- 
lation of  the  Act. 

Section  15  requires  non-resident  companies  to  file  cer- 
tified copy  of  the  resolution  agreeing  to  be  bound  by  the 
Act. 

State  of  Washington  Acts  of  191 1,  Chapter  49,  pro- 
vides for  a  rating  bureau  covering  fire  insurance  as  fol- 
lows: 

Section  73  makes  it  a  condition  precedent  to  the  issu- 
ance of  a  license  to  an  insurance  company  that  it  shall  file 
in  the  office  of  the  Insurance  Commissioner  copies  of  rating 
schedules,  and  requires  the  company  and  its  agent  to  ob- 
ser\e  such  schedules  until  amended  or  corrected. 

Section  74  allows  persons,  co-partnerships  or  domestic 
corporations  to  organize  or  maintain  rating  bureaus  for  the 
purpose  of  inspecting  and  surveying  the  various  municipali- 
ties and  fire  hazards,  etc.,  "for  the  purpose  of  estimating 
fair  and  equitable  rates  for  insurance.  The  business  of  con- 
ducting a  rating  bureau  in  this  State  is  public  service  in 


I04  ADDRESS  OF   MR.   JOHN  T.   STONE 

character.  Every  rating  bureau  shall,  before  publishing  or 
furnishing  any  rates,  file  in  the  office  of  the  Insurance 
Commissioner  its  rating  schedules,  and  shall  not  deviate 
therefrom  until  amended  or  corrected  rating  schedules  shall 
have  been  filed  in  the  office  of  the  Insurance  Commis- 
sioner." 

With  the  wdy  thus  partially  blazed,  and  with  the  clear 
conviction,  drawn  from  all  of  the  facts  herein  presented, 
that  the  business  of  liability  or  workmen*s  compensation 
insurance  cannot  be  conducted  with  the  reasonable  profit 
to  which  the  capital  engaged  in  it  is  entitled,  nor  with  the 
permanent  solvency  which  is  necessary  for  the  protection 
of  the  policyholder,  nor  so  as  to  prevent  unjust  discrimi- 
nations in  rates,  unless  rating  bureaus  are  maintained  by 
the  companies,  are  approved  by  State  authority,  and  all  com- 
panies required  to  adhere  to  the  rates  thus  ascertained  and 
authorized,  your  speaker  has  had  prepared  a  draft  of  a  bill 
to  be  introduced  during  the  coming  winter  in  such  Legis- 
latures as  may  be  in  session,  which  reads  as  follows: 

A  Bill 

Entitled  An  Act  providing  conditions  upon  which 
companies  issuing  Policies  of  Liability  or  Workmen's 
Compensation  Insurance  shall  transact  business  in  this 
State  and  providing  for  the  regulation  and  control  of 
rates  of  such  business  and  to  prevent  discrimination 
therein  and  to  create  a  State  Board  of  Insurance  Re- 
view. 

Section  i.  Be  it  enacted  by  the  General  Assembly 
of  Maryland :  That  all  foreign  or  domestic  corporations, 
companies,  joint  stock  companies  and  firms  and  all  per- 
sons now  issuing  or  which  may  hereafter  issue  in  this 
State  policies  of  insurance  of  the  kind  known  as  lia- 
bility or  workmen's  compensation  insurance  shall  be 
subject  to  the  terms  and  provisions  of  this  act. 

Section  2.  And  be  it  further  enacted  by  the  Gen- 
eral Assembly  of  Maryland:  That  there  is  hereby 
created  a  board  to  be  known  as  the  State  Board  of 
Insurance  Review,  which  shall  be  composed  of  the  In- 
surance Commissioner  of  the  State  of  Maryland  and 
two  other  members  to  be  appointed  by  the  Governor, 
who  shall  be  persons  of  reputed  sound  business  judg- 


ADDRESS  OF   MR.  JOHN  T.  STONE  IO5 

ment  and  experience,  and  who  shall  have  had  at  least 
three  years'  practical  experience  in  the  business  of  lia- 
bility or  workmen's  compensation  insurance.  The  said 
two  members  shall  be  appointed  and  hold  office  for 
two  years  or  until  their  successors  are  appointed.  The 
duties  of  said  Board  shall  be  such  as  are  hereinafter 
defined  in  this  act.  The  Insurance  Commissioner  shall 
be  the  Chairman  of  said  Board,  and  in  discharging  the 
duties  imposed  upon  said  Board  the  concurrence  of  any 
two  members  thereof  shall  be  sufficient  to  constitute 
action  by  it.  Said  members  of  said  Board  other  than 
the  Insurance  Commissioner  shall  each  receive  as  com- 
pensation for  their  services  the  sum  of  *  *  *  dol- 
lars per  annum.  The  said  Board  shall  also  have  a  sec- 
retary, who  shall  receive  an  annual  salary  of  *  *  * 
dollars.  The  salary  of  said  two  members  of  said  Board 
and  that  of  its  secretary  to  be  paid  as  hereinafter  pro- 
vided for. 

Section  3.  And  be  it  further  enacted,  etc.:  That 
every  insurance  company  transacting  in  whole  or  in 
part  the  business  of  liability  or  workmen's  compen- 
sation insurance  in  this  State,  shall  not  later  than  thirty 
days  after  the  Board  hereby  created  shall  be  organ- 
ized file  with  the  secretary  of  said  Board  tables  or 
schedules  showing  the  rates  charged  by  them  on  all 
classes  of  liability  and  workmen's  compensation  in- 
surance which  said  companies  may  issue  in  this  State, 
and  all  charges,  credits,  terms,  privileges  and  condi- 
tions which  in  anywise  affect  such  rates  or  the  value 
of  such  insurance  issued  by  said  companies.  Said  com- 
panies subject  to  the  provisions  of  this  act  shall  also  fur- 
nish to  the  said  Board  of  Insurance  Review  all  information 
or  data  regarding  the  risks  assumed  by  them  and  the 
rates  charged  therefor  which  the  said  commission  may 
upon  demand  require.  Rating  bureaus  or  associations 
composed  of  such  companies  may  be  established  and 
maintained  and  the  manuals,  data  and  other  informa- 
tion compiled  by  said  bureaus  or  associations  shall  be 
filed  with  the  said  Board  as  is  required  of  individual 
companies.  Said  Board  shall  have  full  power  to  sum- 
mon to  testify  before  it  from  time  to  time,  any  officers, 
agents  or  employees  of  said  companies,  bureaus  or 
associations  subject  to  this  act,  or  any  person,  when 
said  Board  shall  deem  the  testimony  of  such  officer, 
agent,  employee  or  person  necessary  for  obtaining  in- 
formation for  the  purpose  of  discharging  the  duties 


I06  ADDRESS  OF  MR.  JOHN  T.  STONE 

imposed  upon  said  Board  by  this  act.  Any  such  officer, 
agent,  employee  or  person  failing  to  appear  before  said 
Board  when  duly  notified  shall  be  subject  to  a  fine 
of  not  less  than  twenty  or  more  than  two  hundred  dol- 
lars. 

Section  4.  And  be  it  further  enacted,  etc. :  That  it 
shall  be  the  duty  of  the  said  Board  of  Insurance  Re- 
view within  the  period  of  six  months  after  its  organi- 
zation under  the  terms  of  this  act  to  prepare  and  pub- 
lish a  manual  of  rates  on  all  classes  of  liability  and 
workmen's  compensation  insurance,  which  said  rates 
when  so  prepared  and  published  shall  be  the  minimum 
rates  to  be  thereafter  charged  in  this  State  by  any 
company  subject  to  the  provisions  of  this  act  for  the 
classes  of  insurance  for  which  said  rates  are  so  pre- 
pared and  published. 

In  ascertaining  and  determining  the  said  minimum 
rates  as  aforesaid  the  said  Board  shall  be  governed 
by  the  following  rules:  First,  The  said  minimum  rates 
shall  in  all  cases  be  reasonable;  Second,  The  said 
minimum  rates  shall  in  all  cases  be  adequate  for  the 
safety  and  soundness  of  the  company  issuing  the  in- 
surance for  which  said  rates  are  to  be  the  minimum 
charge. 

Said  Board  shall  also  have  the  power  to  alter, 
amend  or  revise  such  manual  of  rates  or  any  one  or 
more  of  them  so  as  to  make  them  or  any  of  them 
conform  to  the  provisions  of  this  act. 

Section  5.  And  be  it  further  enacted,  etc. :  That 
no  company  subject  to  the  provisions  of  this  act  shall 
charge  or  receive  any  premium  for  any  liability  or 
workmen's  compensation  insurance  computed  at  a 
lower  rate  than  may  be  fixed,  determined  and  pub- 
lished by  the  said  Board  for  such  class  of  insurance. 

Section  6.  And  be  it  further  enacted,  etc. :  That 
no  such  company  shall  directly  or  indirectly  by  any 
special  rate,  tariff,  rebate,  draw-back  or  other  device, 
charge,  demand,  collect  or  receive  from  any  person  or 
persons,  firm  or  corporation,  a  greater  or  less  or  dif- 
ferent compensation  for  the  insurance  of  risks  men- 
tioned in  this  act  than  it  charges,  demands,  collects 
or  receives  from  any  other  person  or  persons,  firm  or 
corporation  for  like  insurance  of  a  like  kind  and  hazard 
under  similar  circumstances  and  conditions  in  this 
State,  and  any  such  company  violating  the  provisions 
of  this  section  shall  be  deemed  guilty  of  a  misdemeanor 


ADDRESS  OF  MR.  JOHN  T.  STONE  IO7 

and  subject  to  a  fine  of  not  less  than  twenty  nor  more 
than   one   thousand   dollars. 

Section  7.  And  be  it  further  enacted,  etc.:  That 
the  said  State  Board  of  Insurance  Review,  if  it  shall 
find  that  any  company  subject  to  the  provisions  of  this 
act,  or  any  officer,  agent  or  representative  thereof,  has 
violated  the  provisions  of  this  act,  may  at  its  discre- 
tion revoke  the  license  of  said  company  to  do  business 
in  this  State,  provided  that  any  action,  decision  or  de- 
termination of  the  State  Board  of  Insurance  Review 
shall  be  subject  to  the  review  of  the  Courts  of  this 
State  as  hereinafter  provided. 

Section  8.  And  be  it  further  enacted,  etc. :  That 
if  any  company  or  any  other  person,  firm  or  corpora- 
tion which  shall  be  interested  in  any  regulation,  rate 
or  order  fixed,  determined,  published  or  adopted  by 
said  Board  shall  be  dissatisfied  with  any  regulation, 
order  or  rate  fixed,  determined,  published  or  adopted 
by  said  Board,  such  person,  etc.,  shall  have  the  right 
within  thirty  days  after  the  making  of  such  regulation, 
order  or  rate  to  bring  an  action  against  said  Board  in 
any  Circuit  Court  of  this  State  or  any  court  of  Balti- 
more City  having  civil  jurisdiction  to  have  such  regu- 
lation, order  or  rate  vacated  or  modified  and  shall  set 
forth  therein  the  particular  ground  or  grounds  of  ob- 
jection to  any  or  all  of  them.  In  any  such  suit  the 
issue  shall  be  formed  and  the  controversy  tried  and 
determined  as  in  other  civil  cases;  and  the  court  may 
set  aside,  vacate  or  annul  one  or  more  or  any  part  of 
any  of  the  regulations,  orders  or  rates  adopted  or  fixed 
by  said  Board  which  shall  be  found  by  the  court  to  be 
unreasonable,  unjust,  excessive  or  inadequate  to  com- 
pensate the  company  writing  insurance  thereon  for  the 
risks  assumed  by  it,  without  disturbing  others.  No  in- 
junctions, interlocutory  order  or  decree  suspending  or 
restraining  directly  or  indirectly  the  enforcement  of  any 
rate  or  order  of  said  Board  shall  be  granted.  Either 
party  to  any  such  action,  if  dissatisfied  with  the  judg- 
ment or  decree  of  said  court,  may  appeal  therefrom  as 
in  other  civil  cases. 

Section  9.  And  be  it  further  enacted,  etc.:  That 
any  insurance  company  subject  to  the  provisions  of 
this  act,  or  any  officer  thereof,  or  any  agent  or  person 
acting  for  or  employed  by  any  such  company  who 
alone  or  in  conjunction  with  any  corporation,  com- 
pany or  person  shall  willfully  do  or  cause  to  be  done 


I08  ADDRESS  OF  MR.  JOHN  T.  STONE 

or  shall  willfully  suffer  or  permit  to  be  done  any  act, 
matter  or  thing  prohibited  or  declared  to  be  unlawful 
by  this  act,  or  who  shall  willfully  omit  or  fail  to  do 
any  act,  matter  or  thing  required  to  be  done  by  this 
act,  or  shall  cause  or  willfully  suffer  or  permit  any  act, 
matter  or  thing  described  by  this  act  not  to  be  done, 
or  shall  be  guilty  of  any  willful  infraction  of  this  act, 
shall  be  deemed  guilty  of  a  misdemeanor  and  shall  upon 
conviction  be  punished  by  a  fine  not  to  exceed  $ioo 
for  each  offense. 

Section  lo.  And  be  it  further  enacted,  etc.:  That 
the  salaries  of  the  members  of  said  State  Board  of 
Insurance  Review  and  of  its  secretary  and  the  com- 
pensation of  the  necessary  clerical  and  other  assist- 
ants employed  by  said  Board,  and  any  necessary 
traveling  or  other  expenses  incurred  by  said  Board 
in  carrying  out  provisions  of  this  act  shall  be  paid  by 
warrants  drawn  by  the  Comptroller  upon  the  State 
Treasurer,  upon  the  order  of  said  Board,  provided 
that  the  total  amount  of  such  salaries  and  expenses 
shall  not  exceed  the  sum  of  *  *  *  dollars  during 
any  one  year  after  this  act  takes  effect  and  the  said 
Board  is  organized  hereunder;  and  the  said  warrants 
shall  be  charged  against  the  funds  received  by  the 
Insurance  Commissioner  for  fees,  taxes,  etc.,  from 
companies  transacting  liability  or  workmen's  compen- 
sation insurance  in  this  State  and  paid  over  to  the 
State  Treasurer  by  the  said  Insurance  Commissioner. 

Section  ii.  And  be  it  further  enacted,  etc.:  That 
this  act  shall  take  effect  from  and  after  the  date  of  its 
passage. 

The  support  of  all  of  the  companies  engaged  in  this 
class  of  business,  and  of  all  others  who  are  in  anywise 
interested,  is  very  earnestly  desired  to  the  end  that  this 
measure  shall  be  enacted,  in  substance,  in  every  State,  as 
early  as  practicable. 


■saa**; — "■' 


UKIVEESITY  OF  CALIFORNIA  LIBEAEY, 

BEEKELEY 


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